shares of Advanced Micro Devices (NASDAQ: AMD) Shares soared earlier this year on management's increasingly optimistic comments about artificial intelligence (AI)-related sales.
But reality started to settle in after the first quarter update, and the stock is now down about 30% from its peak reached in early spring.
If you've been following along, there are always clear reasons to be optimistic about AMD, and clear reasons to be skeptical. Is it time to buy on a dip in stock prices?
AI will be huge — what happened?
As we enter 2024, CEO Lisa Su and her team are increasingly optimistic about AI chip sales. Su says he expects accelerated computing to be his $2 billion in revenue (accelerated computing is more than just AI, it's a real trend behind the scenes). But in January, it raised its outlook to $3.5 billion.
So AI chips represent a significant (but not huge) new market for a company that had $22.8 billion in revenue in its last reported 12 months. The new MI300 accelerated computing system was AMD's fastest product to grow its revenue to $1 billion, reportedly reaching that status in just two quarters.
Suffice to say investors are excited.
But the reality check? Despite glowing reviews for AMD AI, his $3.5 billion outlook for AI revenue in 2024 was not raised again in the first quarter update.
The outlook for the second quarter was also a bit lackluster. At the midpoint of guidance, revenue for the quarter is expected to be $5.7 billion, up 4% from the previous quarter and just 6% from a year ago, but at the time AMD's results were expected to be a throwaway from a bear market. It stayed.
Hopes that AMD Data Center AI revenue could grow parabolically are (understandably) fading. Nvidiahas it.
AMD's focus should not be the same as Nvidia's
As I've written many times since the completion of the Xilinx acquisition in early 2022, the most important reason AMD has been able to continue winning in semiconductor stocks is increasing profit margins.
This is why I was skeptical about AMD stock's aggressive rally in recent months. Behind all the AI talk from executives over the past few quarters has been a more somber message: profit margins need to get back on track.
In fact, the bear market affected AMD a lot. In particular, consumer spending on PCs and laptops (our client's revenue segment) plummeted. The division's operating income for the first quarter was $86 million, with a profit margin of just 6%. There is a lot of room for improvement as personal PC spending stabilizes this year.
AI chips in data centers are not enough to significantly compensate for weaknesses in other parts of the business, such as embedded (Xilinx) and gaming (video game consoles). But what AMD's data centers lack is revenue growth momentum. do Compensate by expanding profit margins. Operating margin was 23% in the first quarter, compared to just 11% in the year-ago period.
AMD still has a ways to go before it returns to near its last peak profitability level in 2022. However, if things get back on track, the stock could still trade at a reasonable 46x. https://www.fool.com/terms/f/forward-pe/ but that may not be particularly surprising.
Rather than call this a decline, let's pretend that this spring's all-time high for stocks never happened. I'm a shareholder and will be patiently watching how this story plays out, but I'm not buying at this point.
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Nicholas Rossolillo and his clients have held positions at Advanced Micro Devices and Nvidia. The Motley Fool has a position in and recommends Advanced Micro Devices and his Nvidia. The Motley Fool has a disclosure policy.
Is AMD stock a buy after falling 30% from all-time highs? Originally published by The Motley Fool
