Looking Into Advanced Super Micro Devices

This Article Covers:

1. Why AMD is one of the best semiconductor stocks.
2. Why AMD is undervalued.
3. AMD's financial performance.
4. AMD's growth prospects.

What Does AMD Do?

AMD is a global leader in semiconductor technology and the second-largest GPU maker in the world, trailing only NVIDIA. It specializes in high-performance computing and graphics technologies, including CPUs, GPUs, FPGAs, and chipsets for personal computers. AMD is also a key player in x86 technology, which is a foundational architecture for modern computer processors originally developed by Intel in 1978.

AMD’s Four Business Segments:

• Data Center
• Client Computing
• Gaming
• Embedded Business

This report focuses on the data center and client computing segments, where AMD's most significant growth opportunities lie.

Financial Overview and Investment Thesis

In AMD’s Q3 2023 earnings report, the company demonstrated impressive performance:

• Revenue: Up 18% YoY.
• Non-GAAP Gross Margin: 54%.
• Non-GAAP Operating Income: Up 34% YoY.

These results reflect AMD's success in capturing market share from Intel, driven by superior product performance and efficiency. Compared to Intel, AMD has outpaced its rival in profitability and innovation, leading to sustained growth. Based on these trends, AMD could achieve 13.5–20% CPU market share by 2026.

Key Growth Segments

1. Data Centers

• Growth Rate: Revenue for AMD’s data center business grew 120% YoY.
• Revenue Share: Data centers accounted for 52% of total revenue and 60% of operating income in the latest quarter.
• AI Demand: AMD is increasing its market share in AI GPUs, driven by the enormous demand for training and inferencing large language models (LLMs) and frontier AI models.
• Future Outlook: With AI adoption accelerating, the data center business could sustain double-digit CAGR through 2027, solidifying its position as AMD’s largest growth driver.

2. Client Computing

• Growth Potential: High-performance CPUs for personal computers remain a key growth area, driven by demand for advanced gaming systems and frequent upgrades.
• Upcoming Tailwind: In 2025, Microsoft’s discontinuation of support for Windows 10 is expected to trigger a wave of PC upgrades as users migrate to Windows 11, boosting demand for AMD's processors.

Risks and Challenges

1. Gaming Segment

• Cyclicality: AMD’s gaming revenue is tied to demand for consoles like PlayStation and Xbox, which is cyclical and depends on Microsoft and Sony’s product release schedules.
• Competition: AMD trails NVIDIA in the high-end GPU market, creating a potential drag on growth from this segment.

2. Competition from Intel

AMD continues to outperform Intel for several reasons:

1. AMD's CPUs are more competitive than Intel’s in performance and energy efficiency.
2. Intel’s CPUs require more power, leading to inefficiencies.
3. Intel faces product delays and manufacturing issues.
4. Intel lacks the capital strength to sustain its expansive operations effectively.

Growth Catalysts

1. Data Centers and AI Demand

The demand for high-performance AI infrastructure—such as GPUs for training LLMs and inferencing AI models—is surging. AMD’s data center business has positioned itself as a vital supplier for leading AI companies like Microsoft and Meta, with its products powering cutting-edge workloads.

2. PC Market Recovery

As Microsoft phases out Windows 10, AMD is set to benefit from a wave of PC upgrades in 2025. Additionally, gamers who purchased high-performance PCs during the pandemic will likely begin upgrading their systems in 2025 and 2026, driving further growth in AMD's client computing segment.

Valuation and Undervaluation

• Share Repurchases: AMD has an active $8 billion share buyback program, indicating strong confidence in its financial position and providing support for share price growth.
• Debt Management: With $4.5 billion in cash and equivalents and $2.24 billion in total debt, AMD maintains a robust balance sheet.
• Growth Projections: Analysts expect AMD’s revenue growth to accelerate between 2025 and 2028, driven by data centers and AI demand.

→ This leads me to believe with a terminal growth rate of 9-10%, AMDs fair value is $146 based on revenue growth of 13% and revenue with a CAGR of 12.5%.

Conclusion

AMD is a compelling investment opportunity, leveraging its technological leadership, market share gains from Intel, and growth in AI-driven data centers. While the gaming segment's cyclicality poses a risk, AMD’s long-term growth prospects in data centers and client computing far outweigh these challenges. With strong financials and a valuation that suggests undervaluation, AMD remains one of the top semiconductor stocks to watch.