I sold out of Advanced Micro Devices (NASDAQ:AMD) recently and almost immediately regretted it.
I was not unusual. A hard fall in the shares started in early March. It wiped out six months of gains. A recovery was already underway in May. Shares opened May 20 at about $164, down from a high of $213 but well off a low of $144.
Blame the strength of Nvidia (NASDAQ:NVDA). Artificial intelligence (AI) infrastructure spending has been a giant sucking sound for Cloud Czar investment. But the AI game is changing, and AMD has a big role to play.
The Wind Up
AMD reported its March quarter on Apr. 30. Revenue of $5.47 billion was up just 2% from a year ago. Net income under GAAP was just $123 million, 7 cents per share. Even under AMD’s non-GAAP measures net income of $1 billion was just up 4% year-over-year.
It was clear then that AMD has basically lost the server chip race to its rival. Yet that realization seems to have been the catalyst for its latest rise.
That’s because once servers can deliver on AI workloads, they need clients to sell into. Nvidia is historically weak on the client side. But that’s AMD’s meat.
On the earnings call, CEO Lisa Su fed this narrative. There’s a massive PC replacement cycle coming, starting this fall, she said. She called AI “the biggest inflection point in personal computers since the internet.”
Our Louis Navillier agrees. He recently placed a $250 per share price target on AMD stock.
I try not to disagree with Uncle Louie. It’s a good way not to lose money.
A Fat Pitch
Other analysts swung at Su’s pitch, too. After all, AMD has one-third of the PC market, and it continues to gain on Intel (NASDAQ:INTC). If the PC pie is getting bigger, AMD is in for a big slice of growth.
That’s what Jefferies analyst Blayne Curtis decided recently after launching coverage. He put a $190 per share price target on the stock. Funds have also been piling into AMD stock since earnings.
But there’s a problem with that. That problem is ARM Holdings (NASDAQ:ARM). ARM has licensed a small army of chip makers, led by Qualcomm (NASDAQ:QCOM). Analysts at Counterpunch believe these designs could get one-quarter of the PC market by 2027.
Qualcomm, like AMD, is selling to all your favorite OEMs. The most important is Microsoft (NASDAQ:MSFT), which will put Qualcomm chips into its next Surface PCs. It already has an “ARM Advisory Service” online for developers who must support the chip.
It’s Game On
Important to note here that Microsoft is also supporting AMD on the server side, buying clusters of its chips for the Azure cloud. AMD may have been lapped, but it’s still in the race.
Su said new products are selling fast and the company will announce new chips later this year. This will let it return to “strong annual revenue growth and expanded gross margin” later this year, music to any investor’s ears.
New PCs will run its Ryzen Pro portfolio. AMD announced enhancements to that line in April.
The Bottom Line
The data center revolution is not complete. But it’s the PC revolution where the fate of your investment in AMD will be decided.
Today’s product share figures have limited predictive value. The AI PC will be an entirely new market, with new entrants and new expectations.
This will include Nvidia, whose graphics processing units (GPUs) still beat AMD in the PC market. Enterprises looking at old-fashioned desktops, as opposed to laptop PCs, are salivating over these babies.
While AMD is a PC incumbent, and the PC pie is growing, it’s uncertain how much growth that will deliver. There will be growth. But AMD is not the only horse worth considering in this race.
As of this writing, Dana Blankenhorn had a LONG position in NVDA, INTC, and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.
