Summary
AMD's Data Center segment, driven by AI demand, is forecasted to achieve robust revenue growth, contributing to a projected 35% stock CAGR over the next three years.
With a 35% margin of safety, an FY2027 price target of $280, and a discounted intrinsic value of $175, AMD's current $115 price represents a strong buying opportunity.
Geopolitical tensions (e.g., Taiwan) and recession risks pose challenges, but AMD's AI positioning and my cash strategy offer resilience and support a bullish outlook.
Since my last analysis of AMD where I cautioned that the stock was somewhat overvalued but still well-positioned for long-term growth, it has declined by nearly 30% in price. In my opinion, this reflects simple price action and is not reflective of future valuation expansion that I consider somewhat inevitable due to persisting AI demand and AMD's clever AI inference compute positioning.
Based on my outlook, you are witnessing a temporary pullback based on previous heavy overvaluation. Even more important to recognize is that for those with strong stomachs, this is an immense buying opportunity. The price may fall a bit further as it is in a downtrend, but my analysis shows me that the stock has about a 35% margin of safety and could deliver a 35% compound annual growth rate from the present price over the next three years. Therefore, I consider AMD stock to be a Strong Buy.
Q4 Preview
Of course, avid followers of AMD will remember that in Q3 the company presented Q4 guidance which was below Wall Street's expectations. This has tempered investor sentiment. At a Q4 revenue of $7.5 billion, the company will have achieved a 22% year-over-year growth and a 10% sequential increase from Q3.
The Data Center segment accounted for over half of the company's revenue in Q3, with a 122% year-over-year revenue growth rate. However, the Gaming segment has shown weakness recently, but this is likely to have improved in Q4, not least because of seasonal demand but also because of new product launches, like the Ryzen 9000 X3D chips, released in November 2024.
It's worth bearing in mind that AMD's MI300-series graphics processing units have been labeled the "fastest-ramping product" in the company's history, with sales exceeding $1 billion in less than two quarters. With the company expecting Data Center graphics processing unit revenue likely to surpass $5 billion for 2024, the bull-case remains strongly intact as major hyperscalers like Microsoft (MSFT) and Meta (META) continue to seek AMD's offerings as cheaper alternatives to Nvidia's (NVDA), and often at better performance for specific workloads.
Whatever the results are at Q4 (results scheduled for Feb, 04), I would not get too hung up on the specifics, but rather watch for guidance and see if this is lower, or higher, than the Wall Street consensus. That will give us some idea of whether the current forward growth horizon for AMD is too optimistic on Wall Street. In my opinion, the company's Data Center segment will continue to perform exceptionally well over the next two to three years at least because there is an insatiable AI arms race to artificial superintelligence. I believe it is important for AMD shareholders and potential investors to watch management's comments in Q4 about if they plan to more aggressively focus on AI and are willing to strategically sacrifice more of the other segments' growth while the opportunity for selling graphics processing units, central processing units, and tailored inference chips to AI developers remains remarkable.
The Embedded segment has shown heavy year-over-year declines in Fiscal 2024, but it has shown stabilization prospects in Q3. Therefore, in Q4 the Embedded segment will more likely than not remain more robust compared to at the beginning of the year. The Client segment has been growing throughout the year, but the rates of growth have slowed considerably, from 49% year-over-year growth in Q2 to 29% year-over-year growth in Q3. Therefore, I expect much more moderate growth from the Client segment in Q4 compared to the Data Center segment, which remains the core area of operations to monitor.
Valuation
For my valuation model, I have chosen a period of three years because I consider this the highest-return holding period before the company's fundamental growth rates will likely slow.
I forecast that the company's annual revenue will reach $44.5 billion for Fiscal 2027, in large part supported by the expanding Data Center segment and tailwinds on other segments from this. In addition, as the company will be benefiting from profit harvesting during the up-cycle of its AI demand cycle, I forecast a GAAP net margin of 30% for Fiscal 2027. This translates to a Fiscal 2027 GAAP net income of $13.35 billion.
The company's diluted weighted average shares outstanding have increased at approximately a 10% compound annual growth rate over the past five years. I expect this trend to moderate somewhat as the company further capitalizes on its recent investments to position it in AI. At a 5% share count compound annual growth rate over the next three years, the company will have 1.9 billion outstanding shares. Therefore, I forecast a GAAP earnings per share of $7 for AMD in Fiscal 2027, and a revenue per share of $23.40 for AMD in Fiscal 2027.
I consider AMD to be reasonably valued right now because its trailing 12-month price-to-sales ratio is down 12.5% from its five-year average, with revenue growth in Fiscal 2025 and 2026 likely to hit around 25%, compared to 25% as a forward five-year average.
The company typically has a GAAP price-to-earnings ratio of around between 30 and 50 during profit harvesting phases in the past. I believe a GAAP price-to-earnings ratio of 40 is fair and conservative to use as my terminal multiple, which is the midpoint in this band. The result is a Fiscal 2027 price target for AMD of $280.
AMD's weighted average cost of capital is 16.85%, with an equity weight of 98.6% and a debt weight of 1.4%. Equity costs 17.03% and debt costs 3.75% after tax. When discounting back my Fiscal 2027 price target for AMD back to the present day over three years, the implied intrinsic stock value is $175. As the stock is currently priced at $115, the implied margin of safety for investment is approximately 35%.
AMD Valuation (Oliver Rodzianko's Model)
Risks
One of the greatest risks to this thesis, which applies not only to AMD but more broadly to all stocks and particularly tech, is the risk of a recession and intensifying geopolitical conditions surrounding Taiwan. While conditions are currently latent between China and Taiwan in terms of forceful occupation strategies from the former against the latter, it does not mean that China is not planning such actions. Indeed, for those who watched Xi Jinping's 2025 New Year's address, they will have noticed he brought up the inevitable issue of China's commitment to geopolitically recognized unification with Taiwan.
"We Chinese on both sides of the Taiwan Strait belong to one and the same family. No one can ever sever the bond of kinship between us, and no one can ever stop China's reunification, a trend of the times." — Xi Jinping, 2025 New Year's Address
The answer to this uncertainty is a robust cash position to capitalize on any market downturn of any magnitude that may occur. I currently have 1/3 of all assets in cash or equivalents, and plan to keep it this way for the foreseeable future.
In addition, while AMD's Data Center segment is positioned for robust growth driven by AI demand, any underperformance or stagnation in its non-Data Center segments could weigh on overall revenue growth and profitability. This is where I think it is really on management to aggressively reorient toward AI and not allow other weaker segments to distract from the revenue and earnings up-ramp available to the company in the next three years. In a weaker outlook, we could be looking at a more moderate price target of $250 or less in Fiscal 2027. That addressed, the demand horizon for AI is robust and AMD is the second-best positioned to capitalize on this demand behind Nvidia, so the operational moat for investment security here is quite wide.
Conclusion: Strong Buy
This is a time to be greedy when others are fearful. Just because a stock has declined significantly in price recently does not mean its future return prospects are not robust. In fact, the greatest wisdom of all time is simple to understand, but hard to follow. The secret to getting rich has long been stated as sell high and buy low, or be greedy when others are fearful, and fearful when others are greedy. Of course, the company has to be operationally robust with an inflection point, but I believe we have that through financial growth in the next three years largely driven by AI demand and higher performance compute in association with this potentially providing tailwinds to AMD's other segments. Therefore, I am bullish on the stock at its current valuation, and confidently issue a Strong Buy rating with a three-year time horizon.