Advanced Micro Devices is at a significant inflection point

Advanced microdevices NASDAQ:AMD The stock price imploded following the fourth quarter release, but investors shouldn’t fear the move. The decline is a knee-jerk reaction to expected news, preparing the market for another run. The fourth quarter results did not catalyze a rally but highlighted a bifurcation in the semiconductor market. On one hand, end-market normalization continues to impact some segments, while cloud and AI are driving growth in others.

This bifurcation is creating a growth headwind, seen in the first quarter outlook, below analysts’ consensus forecasts, but a turning point is within reach. End-market inventories are expected to normalize by the end of the year, and data center/AI sales are on the rise. At some point this year, these forces will align to boost revenues and spur margin and earnings expansion.

Does Advanced Micro Devices have a similar quarter to NVIDIA?

Advanced Micro Devices stock prices soared in the fourth quarter of 2023 and January 2024 on hopes that the company would have a Like NVIDIA NASDAQ:NVDA AI-driven quarter, and so it was. The problem is that NVIDIA-like results are limited to two segments and offset by weakness in others. As a result, revenue increased 10.7% in the fourth quarter, in line with analyst consensus.

Segmentally, Data Center and Client grew 38% and 62% on GPU, CPU and Ryzen Epyc CPU demand. These GPUs and CPUs are critical to AMD’s AI program. The results are compounded by rising sales expectations in 2024. Both segments are setting records and are expected to accelerate this year. Gaming and Embedded declined 17% and 24% due to weak demand related to high supply and end-market inventories.

Margin news is also favorable. Margin increased sequentially on a GAAP and adjusted basis with adjusted gross margin unchanged from last year. Gross earnings increased 21% and adjusted gross earnings 6%, leaving fourth-quarter adjusted EPS at $0.77, as expected.

The indications are mixed and are the main cause of the post-release stock collapse. The company released first-quarter guidance predicting a larger sequential decline than analysts expected. However, forecasts are likely to be cautious and offset by an expectation of margin expansion and business acceleration throughout the year.

Forecasts for MI300 sales alone have nearly doubled since the last report and are compounded by expectations for solid Ryzen and Epyc sales. The company didn’t provide specific guidance for the year, but analysts expect a 15% gain, accelerating to more than 20% in 2025, with margin expansion in both years. Earnings are expected to grow 40% this year and nearly 50% next year, pushing the stock valuation below 30X with the post-release decline.

Analysts guide Advanced Micro Devices higher

Analysts back Advanced Micro Devices and lead the market higher. The post-release pullback in price action is sharp but aligns the market with the analyst consensus, which is up nearly 100% over the past year.

Fourth quarter results and first quarter guidance may not trigger a series of upward revisions, but no significant downward revisions are expected either. As it stands, there have been no price targets set below the consensus of $162 since 2023, and there have been 14 revisions in 2024. These 14 include some mixed activity but have an average target of $180 or 11% above the consensus, and many did. this stock to a new high.

The decline in AMD stock prices is concerning and could be a barrier to rising prices. However, the dip represents a healthy and necessary correction following the stock’s solid rally and will likely lead to a buying opportunity soon. If the support at $162 fails to hold, the 30-day EMA is the next best target. A drop below would be worrisome and could send the stock into a deeper decline. The market should start to consolidate and move sideways, assuming it can find support above the 30-day EMA, with the possibility of reaching new highs by mid-year.

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