1 Artificial intelligence (AI) stock is down 29% to buy now before it rises 78%

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The chip stock fell after the release of the company's latest earnings report, but investors shouldn't lose sight of the bigger picture.

Advanced Micro Devices' (AMD -0.28%) The artificial intelligence (AI)-driven rally has stalled in 2024. The chipmaker's shares are down 29 percent since early March, when they were trading at a 52-week high, and the company's latest results are missing. Will help arrest the slide.

AMD released first-quarter 2024 results on April 30, and investors hit the panic button. Let's see why that was.

The results were not strong enough to justify the expensive diagnosis of AMD

AMD reported Q1 revenue of $5.47 billion, up just 2% from the year-ago period. The company's non-GAAP earnings also rose to $0.62 per share during the quarter, at a 3% year-over-year pace. Analysts were looking for $0.62 per share on revenue of $5.48 billion, which means AMD barely met the bottom estimate and failed to meet revenue expectations.

Mentoring also didn't inspire much confidence. AMD expects second-quarter revenue to reach $5.7 billion, an increase of just 6 percent year over year. Although Q2 earnings forecasts point to a modest acceleration in AMD growth, Wall Street was expecting slightly higher revenue of $5.73 billion.

For a stock that's trading at 218 times inflated earnings, AMD needs to deliver much stronger growth to justify its rich multiple. The company was able to do so in two of its business segments, which are already reaping the benefits of AI diffusion, but weakness in the other two business segments weighed on its financial performance.

More specifically, AMD's gaming revenue fell 48% year over year to $922 million. The sharp decline was a result of poor demand for AMD's semi-custom chips, which are deployed in gaming consoles. Microsoft And Sonyas well as weak sales of the company's gaming graphics cards. The weakness in this segment is not surprising, as sales of personal computers (PCs), where gaming graphics cards are deployed, were weak last year.

Additionally, the video gaming market was flat last year. However, market research firm Newzoo is predicting an improvement in console sales this year. So AMD could see a gradual improvement in its gaming revenue as the year progresses.

On the other hand, the company's revenue from the embedded segment fell 46% year-on-year to $846 million. AMD's embedded processors are deployed in a variety of industries, from automotive to industrial to networking to storage. AMD says customers are working through their existing inventory in this market, which explains why demand for its embedded chips has ultimately been weak.

However, AMD claims that its design's winning momentum in the embedded market is strong, which means its embedded processors have been selected for deployment in more products in the future. Once these products go into production, AMD should ideally see an improvement in demand for its embedded processors, especially considering that the company claims its new offerings outperform previous-generation processors. Capable of handling AI workloads faster than

This brings us to the two areas where AMD is making impressive progress now thanks to the growing adoption of AI, and which are likely to bring solid acceleration to the company's growth in the future.

These businesses are benefiting greatly from adopting AI.

AMD reported record revenue of $2.3 billion in its data center business last quarter, an impressive 80% increase over the year-ago period. The company attributed this impressive growth to increasing demand for its AI GPUs (graphics processing units) as well as server processors.

The chip giant pointed out that shipments of its MI300X AI accelerator are growing strongly, a trend that is likely to continue as “more than 100 enterprise and AI customers are actively developing or deploying the MI300X.” AMD has already sold $1 billion worth of these chips in the past two quarters, and is now expected to finish the year with $4 billion in revenue from sales of data center GPUs.

This points to an improvement in the company's quarterly revenue run rate from the data center GPU market. It's also worth noting that AMD sold $400 million worth of its AI accelerator in the fourth quarter of 2023 when its new AI chips went on sale. Also, the company's $4 billion revenue forecast from the segment for 2024 is more than double its original expectation of $2 billion, and was higher than the $3.5 billion revenue forecast released in January of this year.

So AMD's potential revenue pipeline from sales of AI chips is growing at a good pace, suggesting its data center business could continue to grow.

Meanwhile, AMD's revenue in the client business also jumped to $1.4 billion, an impressive 85% increase from the year-ago quarter. The company is now seeing a good turnaround in demand for its PC processors thanks to the recovery in this market as well as the growing demand for AI-enabled PCs. The company is offering dedicated AI accelerators on its CPUs, which puts it in a good position to take advantage of the coming AI PC boom. In the words of CEO Lisa Sue:

We see AI in the PC as the biggest inflection point that has the potential to deliver productivity and usability gains unmatched since the Internet. We are working closely with Microsoft and a broad ecosystem of partners to bring the next generation of AI experiences powered by Ryzen processors to AMD AI PCs by the end of the year with more than 150 ISVs. could

With market research firm Canalys expecting AI PC shipments to grow at an annual rate of 44% through 2028, investors can expect strong growth in AMD's client business in the coming years.

Overall, the data center and client businesses generated 67% of the company's top line last quarter. They are currently in great health and able to move the needle in a big way thanks to the AI-related catalyst for AMD. Throw in the potential change in the other two segments, and it's easy to see why AMD's top-line growth is expected to accelerate in 2025 and 2026 after an estimated 13 percent increase from last year's level to $22.7 billion this year. .

AMD revenue estimates for current fiscal year data by YCharts

Even better, analysts are predicting AMD's revenue to grow at an annual rate of 25% over the next five years. That could indeed happen thanks to the catalysts discussed above, which means AMD's earnings could reach $8.09 per share by the end of 2028 (using its 2023 earnings of $2.65 per share as a base).

AMD's five-year average forward earnings multiple is 33. Multiplying that with expected earnings in 2028 points the stock price toward $267, a potential upside of 78% from current levels. That's why investors would do well to use AMD's pullback as a buying opportunity, as this AI stock could turn out to be a winner in the long run once it starts to accelerate.

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