AMD Rises 10% in a Month: How Should Investors Play the Stock?

Advanced Micro Devices AMD shares have gained 10%, outperforming the broader Zacks Computer & Technology sector's return of 9.7%.

The semiconductor chip provider has been riding on strong performance of the Data Center segment. In the second quarter of 2024, Data Center revenues surged 114.5% year over year to $2.83 billion and accounted for 48.6% of total revenues. Sequentially, revenues increased 21%.

Exiting second-quarter 2024, AMD had more than 900 public cloud instances available, with Netflix and Uber selecting fourth-gen EPYC public cloud instances. In the data center AI business, MI300 quarterly revenues exceeded $1 billion for the first time.

Enterprise and Cloud AI customer pipeline remains robust. AMD and its partners, including Microsoft, Oracle, DELL, HPE, Lenovo, and Supermicro, have instinct platforms in production.

So, the question that really arises in an investor's mind is - Will momentum in AMD's share price continue on the data center strength and acquisitions? Let's analyze.

AMD Stock Outperforms Sector

Image Source: Zacks Investment Research

AMD Stock Rides on Accretive Acquisitions

AMD's acquisitiveness is aimed at primarily reducing the technological gap with NVIDIA in the ongoing race for AI dominance. It has been on an acquisition spree to strengthen its AI ecosystem.

In the past 12 months, AMD has spent $125 million on a dozen of acquisitions. Nod.ai and Mipsology are some other notable acquisitions in the recent past.

It recently closed the acquisition of Helsinki, Finland-based Silo AI. AMD is strengthening its data center AI footprint with the announced acquisition of ZT Systems for roughly $4.9 billion in cash and stock.

The ZT System deal, expected to close in the first half of 2025, will expand AMD's data center AI footprint. ZT System serves a number of the world's largest hyperscalers through its AI and general-purpose compute infrastructure offerings.

The acquisition will help AMD offer optimized rack-scale solutions in the data center AI accelerator market, which is expected to hit roughly $400 billion in 2027.

AMD expects the transaction to be accretive on a non-GAAP basis by the end of 2025.

AMD Stock Rides on Strong Data Center Demand

Both AMD and NVDA have been the darlings of investors, driven by the massive proliferation of AI that has created a strong demand for GPU chips required to power AI models. The AI space is expected to remain robust with increased spending by cloud computing providers like Microsoft and Alphabet.

In the second quarter of 2024, Microsoft expanded its usage of MI300X accelerators to power GPT-4 Turbo and multiple co-pilot services, including Microsoft 365 Chat, Word and Teams. It also became the first large hyperscaler to announce the general availability of public MI300X instances.

AMD's initiatives to expand its portfolio are making it well-positioned to challenge NVDA not only in the data center market but also in the growing AI-enabled consumer PC market.

New offerings like the Instinct MI325X accelerator are helping to expand AMD's footprint in the data center market. AMD has launched the Ryzen AI 300 Series, the third generation of AMD AI-enabled mobile processors, and Ryzen 9000 Series processors for laptop and desktop PCs.

AMD's Estimate Revision Shows Upward Trend

AMD expects third-quarter 2024 revenues to be $6.7 billion (+/-$300 million). At the mid-point of the revenue range, this represents year-over-year growth of approximately 16% and sequential growth of approximately 15%.

The Zacks Consensus Estimate for third-quarter 2024 revenues is pegged at $6.71 billion, indicating 15.71% growth year over year. The consensus mark for earnings is pegged at 91 cents per share, up by a penny over the past 30 days and suggests 30% year-over-year growth.

AMD Stock Overvalued

AMD stock is overvalued, as the Value Score of F suggests a stretched valuation at this moment.

The stock is trading at a premium with a forward 12-month Price/Sales of 7.98X compared with the Zacks Computer and Technology sector's 6.23X.

P/S Ratio (F12M)

Image Source: Zacks Investment Research

Conclusion

AMD's expanding portfolio, thanks to acquisitions of Silo AI and ZT Systems, is expected to boost its top-line growth. Investors who already own the stock may expect the company's growth prospects to be rewarding over the long term.

However, AMD's near-term prospects are dull, given the weakness in the Gaming segment amid stiff competition from NVIDIA. AMD has a Growth Style Score of D, which makes the stock unattractive for growth-oriented investors.

AMD currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock.

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