AMD's post-earnings slide is a buying opportunity. Here's why

Advanced Micro Devices on Tuesday posted a solid set of third-quarter results thanks to strong sales in the data center and PC markets. But shares fell more than 7% in extended trading, as investors wanted to see faster growth in its AI chip business. We're taking the long-term view here. Revenue in the three months ended Sept. 28 advanced 18% year over year to $6.82 billion, topping estimates of $6.71 billion, according to LSEG. Adjusted earnings per share (EPS) rose 31% on an annual basis to 92 cents, matching estimates LSEG data showed. The market reaction to AMD's earnings continues up-and-down month for AMD shares, which in recent sessions had regained their footing after a more-than-10% pullback after its AI-focused investor event Oct. 10. We bought that pullback twice, on Oct. 15 and then again Oct. 23 . AMD YTD mountain AMD's year-to-date stock performance. Bottom line The main part of our AMD thesis — fast-growing sales of its MI300 AI chips — is still on track, so we view the post-earnings pullback as a buying opportunity. We're reiterating our 1 rating and price target of $200 a share. The MI300 is AMD's high-powered processor used in data centers to run and train artificial intelligence applications. We think these products will make AMD the No. 2 player in a booming market currently dominated by Nvidia , a fellow Club holding. AMD CEO Lisa Su expects the total addressable market for AI chips — sometimes referred to as AI accelerators due to their computational abilities — to grow more than 60% annually to $500 billion by 2028 . We're confident Nvidia will remain the king of the market, but AMD should be able to carve out a solid portion, too. Given how integral these AI chips are to AMD's growth, we were pleased management on Tuesday night raised its full-year sales projections to exceeding $5 billion. That's a $500 million increase from the guidance offered in late July and well above the $2 billion it expected at the start of the year. Su said better capacity across its entire supply chain contributed to the positive guidance revision. Another factor: AMD's chips passed some performance milestones with customers, Su said. While the MI300 guidance was a critical part of the earnings call, investors were widely expecting this update. That's why the stock couldn't pare its heavy after-hours losses despite the disclosure. Still, we are not deterred in our thesis. We believe Su's AI roadmap — outlined at its AI event earlier this month — will lead to significant sales growth in 2025 and thereafter. Advanced Micro Devices Why we own it: AMD's relatively new AI chip, the MI300, is carving out a niche in that rapidly expanding market at the same time a new personal computer refresh cycle is getting underway. AMD CEO Lisa Su also has proven to be one of the best executives in the chip industry. Competitors: Intel, Nvidia and Club holding Broadcom Weight in Club portfolio: 2.98% Most recent buy: Oct. 23, 2024 Initiated: July 15, 2024 "We feel very good about the market from everything that we see talking to customers," Su explained in her high-level commentary about 2025. "There's still significant investment in trying to build-out the infrastructure required across all of the AI workloads." In her optimism on next year, Su also cited AMD's plans to release next-generation AI products on an annual basis and expanding relationships with customers. To be sure, supply remains a limiting factor, with Su saying the environment "will continue to be tight" over the next few quarters into 2025. Even so, Su said AMD has "planned for significant growth going into 2025." This sounds like a high-quality problem. Another reason for some of the disappointment Tuesday could be the lack of new customer announcements. That also was something investors wanted to see at the October AI event. However, we think it is only a matter a time before more cloud customers catch on. Plus, the acquisition of ZT Systems' engineering team, which was announced in August , should help AMD build out its AI infrastructure. We look forward to hearing more about the quarter from Su on Wednesday morning on CNBC. Jim Cramer is set to interview her on "Squawk on the Street" during the 9 a.m. ET hour. Quarterly commentary Sales in AMD's all-important data-center segment came in $3.55 billion, exceeding estimates and more than doubling year over year. Behind the growth was the strong ramp of AI chip shipments to cloud customers, original equipment manufacturers (think firms that make servers like Dell Technologies) , and AI companies. Club holdings Microsoft and Meta Platforms were two relationships highlighted on the conference call. Microsoft is using MI300 accelerators to power their internal workloads and for Copilot services. And Meta is deploying the MI300 exclusively to handle all live traffic for its most-demanding model in the Llama family. The legacy part of AMD's data center business — sales of traditional central processing units in servers — had a good quarter, too. The company said it gained share in the CPU server market as enterprise wins picked up and cloud providers expanded their use of EPYC-branded chips. AMD's data center business is now 52% of companywide revenues, up from 37% in the fourth quarter of 2023. AMD's client segment — home to sales of processors for desktop and laptop computers — was the biggest bright spot in the quarter. The business generated a better-than-expected $1.88 billion in revenue, an increase of 29% year over year. Meanwhile, operating income almost doubled to $276 million. The company credited strong demand for its Zen 5 Ryzen processors for the revenue growth. Looking out to 2025, Su expressed optimism that the PC market could grow in the mid-single digits. Catalysts for that grow include AI-infused PCs — AMD has a strong presence there — and the business refresh of the "hundreds of millions" of Windows 10 PCs that will no longer receive Microsoft technical support. On the other hand, AMD's gaming unit — home to chips for gaming consoles and 3D graphics — was worse than expected, sinking 69% from last year to $462 million. The market shouldn't care about this result. This division is a such a small part to the story. Embedded — the segment housing Xilinx, which AMD acquired in 2022 — was a little better than expected, with revenue of $927 million. That figure may be down 25% year over year, but the 8% increase on a sequential basis is a good sign the business is making a gradual recovery. These chips sell into several end markets, which range from telecommunications to industrial and automotive. Although the embedded market is down, the company thinks design wins being up more than 20% on an annual basis this year positions it to grow faster than the overall market in the years ahead. Guidance AMD said it expects fourth-quarter revenue of $7.5 billion, plus or minus $300 million. Analysts were expecting a guide of $7.55 billion, according to FactSet, so it is a tiny miss. Revenue is expected to be up 10% sequentially, driven by growth across data center, client and gaming. Fourth-quarter adjusted gross margins are expected to be 54%, which would be a small quarter-over-quarter improvement and slightly better than Wall Street expectations. As mentioned, AMD upped its forecast for AI chip sales in 2024 to more than $5 billion, a $500 million increase from the guidance offered in July. (Jim Cramer's Charitable Trust is long AMD. See here for a full list of the stocks.) 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Advanced Micro Devices on Tuesday posted a solid set of third-quarter results thanks to strong sales in the data center and PC markets. But shares fell more than 7% in extended trading, as investors wanted to see faster growth in its AI chip business. We're taking the long-term view here.