AMD October 29 earnings forecast｜AI chip growth potential and DCF valuation reveal long-term investment opportunities

Hello everyone, welcome to "US Stock Research Report" (WeChat public account: US Stock Research Report), I am the station master. Today, we will delve into a highly anticipated semiconductor company—Advanced Micro Devices $AMD(AMD.US). This issue will focus on AMD's product line, future AI chip layout, shipment forecasts, market expectations for the Q3 earnings report, and an analysis of the company's valuation and target price.

Part 1: AMD's Recent Market Performance and Company Updates
1. Current State of the Semiconductor Market
This year, the semiconductor market has experienced significant volatility, especially after upstream supplier ASML reported poor performance and its stock price declined, affecting the entire industry. However, AMD, as a company focused on chip design, has maintained its growth momentum due to its unique positioning in the AI and data center sectors. With its expanding AI GPU product line and data center business, AMD has demonstrated strong growth potential in the AI-driven market.

2. Recent Market Performance
AMD's aggressive layout in the AI-driven GPU sector is particularly notable. In recent years, the company has launched multiple AI accelerators and data center-specific products, actively expanding its market share. Notably, its latest MI300 AI accelerator has gained recognition from several major tech companies. Additionally, AMD will launch the MI325 to further strengthen its influence in the data center sector, which is expected to positively impact its market share in the coming years.
Part 2: Analysis of AMD's Product Line
1. CPU Product Line—Desktop and Server
In the CPU market, AMD's Ryzen and EPYC series have performed strongly:
Ryzen Processors: AMD's Zen architecture processors are highly popular among gamers and professionals, especially due to continuous improvements in performance and energy efficiency. The recently launched Zen 5 Ryzen 9000 series shows limited performance gains compared to the previous generation, but the X3D version, set to release on November 7, 2024, is expected to significantly boost gaming performance.
EPYC Server Processors: In the enterprise market, AMD's EPYC processors have gained widespread recognition for their higher energy efficiency and multi-core performance. This has gradually expanded AMD's influence in the data center market. Competing with Intel's Ultra series processors, EPYC is widely adopted in major cloud computing platforms and data centers.

2. GPU Product Line—Consumer and Data Center
In the graphics processor (GPU) sector, AMD also offers segmented products for consumer and enterprise markets:
Radeon Series: AMD's Radeon series primarily targets gamers. Despite facing fierce competition from Nvidia in the high-end gaming market, AMD has steadily consolidated its position in the mid-range market by optimizing power efficiency and performance.

Part 3: Future Product Layout and AI Chip Shipment Forecasts
1. AI Accelerator Series
AMD plans to launch the MI325X AI accelerator in Q1 2025 to meet the growing AI demands of enterprises and data centers. This AI GPU will directly compete with Nvidia's Blackwell series. AMD's Instinct MI325 is claimed to offer 40% higher inference performance than Nvidia's H200 chip, which is crucial for high-demand AI tasks like large language models and inference computing. With the release of these products post-2025, AMD's AI GPU market share is expected to expand gradually.
2. Shipment Forecasts
Short-term shipment expectations: AMD showed strong growth momentum in H1 2023, with its data center business growing 115% year-over-year. Analysts predict that with the further release of the MI300 and MI325, AMD's share in the AI GPU market will increase significantly. Piper Sandler estimates that AMD's AI GPU revenue will reach $5 billion in 2024 and exceed $10 billion in 2025.
Long-term growth trends: Given the robust global demand for AI in the coming years, AMD's AI GPUs hold immense potential in the data center market. AMD is expected to achieve significant expansion in its data center business by 2025, while supply constraints for its high-end AI GPU products will drive gross margin improvements. AMD's gross margin is projected to rise from the current 49% to over 60% by 2025, gradually aligning with Nvidia.
Part 4: AMD's Q3 Earnings Expectations
1. Key Financial Metrics Forecast
Let’s look at the key financial expectations for AMD's Q3:
Earnings Per Share (EPS): Below are our forecasts
We expect AMD's EPS to be $0.91, a 30% year-over-year increase, surpassing Wall Street's estimate of $0.41. Against the backdrop of a global economic slowdown, AMD's growth reflects its success in data center and AI-driven businesses.
Revenue Growth: We project AMD's Q3 revenue at $6.71 billion, up 15.72% year-over-year, in line with Wall Street's expectations. The revenue growth is primarily driven by increased sales of data center and AI chips, particularly the strong performance of the MI300 and the upcoming shipments of the MI325.
Gross Margin: AMD's gross margin is expected to reach 53.5%, slightly higher than the previous quarter. The increase aligns with market expectations due to high demand for AI chips and premium data center products, further supporting AMD's future profitability.
Overall, AMD's earnings are poised for healthy growth.
2. Data Center and AI Business Drivers
AMD's data center business grew 115% in Q2, and Q3 earnings are expected to continue this positive trend. With rising global demand for AI, strong sales of the MI300 are likely to drive growth in AMD's AI GPU business. The MI325 will also begin shipments in Q1 2025, laying the groundwork for AMD's further expansion in the data center market.

Part 5: Valuation and Target Price Analysis (WeChat public account: US Stock Research Report)
Next, let’s focus on AMD's valuation.
We used a DCF model to value AMD, forecasting a 25% growth in its data center business for FY2025, a 40% growth in client business, a 50% decline in gaming business, and a 30% decline in embedded business. Under these assumptions, AMD's overall revenue is expected to grow 12% in FY2025.
Based on our calculations, AMD's risk-free rate is 3.6%, beta is 1.81, equity risk premium is 7%, debt cost is 5%, and tax rate is 13%. Using these parameters, we derived AMD's weighted average cost of capital (WACC) at 12%.
Based on these revenue growth projections, our DCF model suggests AMD's fair value is $205 per share, indicating a 31% upside potential and clear undervaluation.

Part 6: Summary (WeChat public account: US Stock Research Report)
In summary, AMD's development roadmap for GPUs and CDNA architecture indicates immense growth potential over the next two years. With the expansion of its data center business, successful deployment of the MI300X, and sustained popularity of Ryzen processors, AMD's revenue and profits are poised for continued growth.
Based on our valuation analysis, we set AMD's target price at $205 per share, implying a 31% upside potential and clear undervaluation.

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