Advanced Micro Devices Inc (NASDAQ:AMD, ETR:AMD) earnings for the fourth quarter of 2023 "just exceeded" expectations but the market's disappointed reaction to guidance for 2024 is "missing the forest the trees", according to analysts at Wedbush.
Revenues for Q4 beat the Wall Street average forecast and earnings per share were in line but guidance for the first quarter of this year was "slightly below" consensus, the analysts said.
However, "the call wasn't about Q4 results or the company's Q1 outlook" but rather the focus was "solely on commentary regarding the success of AMD's AI efforts" as well as what management might say around the future outlook for AI sales, said Wedbush's Matt Bryson.
AMD stock has been driven up 50% as expectations have been ratcheted up since the company's AI-focused event in December.
As such, even with AMD lifting its outlook for sales of AI chips in 2024 to north of $3.5 billion, up 75% from the guidance management provided less than two months ago, the stock dipped significantly 6% after-hours and was down 4% when trading began on Wednesday.
"We view this reaction as missing the forest (that AMD is establishing itself as the clear market alternative) for the trees (a conservative management team guided below an 'everything goes exactly right' type expectation) as Little Red Riding Hood makes her way over the river and through the woods," said Bryson, admitting an "awkward mangling" of a children's tale to make the point.
"And even though Team Red doesn't appear likely to defeat the Wolf (Nvidia) in this particular narrative, unlike in the classic fairy tale, which is a zero-sum game, our Red, by establishing itself as the clearest Nvidia alternative likely garners 10%+ of AI market revenues and is happy (and wealthy) ever after."
The Wedbush team sees accelerated adoption of AMD's MI300 series accelerators in 2024 sparked by large customer commitments as justifying a better outlook than AMD originally forecast for its AI parts.
Based on the expected AMD accelerator sales that the guidance implies, AMD is "the clear #2 to Nvidia", Bryson said.
Wedbush reiterated its 'outperform' rating on the stock, given its optimism about future prospects, particularly in the AI market segment, with a price target remaining at $200 versus the $172.06 closing price on Tuesday.
The target price is based on a price/earnings multiple of roughly 30 times forecast 2025 earnings per share plus net cash.
"While this multiple is meaningfully above AMD’s historic average, it does fit with AMD’s valuation during prior periods where AMD has enjoyed elevated growth similar to our 2024 and 2025 forecasts," Bryson explained.