Why AMD Stock Investors Should Be Cautious in the Short-Term

Advanced Micro Devices (NASDAQ:AMD) is set to report second-quarter fiscal 2024 earnings on July 30th. I expect the chipmaker to post strong results. Wall Street has rewarded the stock due to the explosive growth in artificial intelligence applications and a recovery in the PC market. However, while AMD’s long-term prospects remain bright, I’m taking a more cautious stance on the stock in the near term. Let’s dig a little deeper into why that’s the case!

AMD’s Financials: Mediocre but Momentum Is Promising

AMD is projected to report Q2 revenue of $5.73 billion, up 7% year-over-year, with earnings per share of 68 cents. The company’s data center segment will be the star of the show, likely hitting a record high due to strong demand for AI accelerators like the MI300. In Q1, data center revenue surged 80% to $2.3 billion. I expect that momentum to continue.

The PC market is also showing signs of life after a prolonged slump. Global PC shipments grew 3.1% in Q2, which bodes well for AMD’s client computing business. The successful ramp of Ryzen processors helped drive 85% growth in this segment last quarter. As PC vendors restock inventory, AMD should see a nice uplift.

Looking further out, AMD is extremely well-positioned to ride the AI megatrend. The company expects AI-related revenue to exceed $3.5 billion this year, but I think that’s conservative given the rapid pace of AI adoption. AMD’s AI chips provide a compelling alternative to Nvidia’s (NASDAQ:NVDA) dominant GPUs.

Nvidia vs AMD: Is There Even a Comparison to Be Made?

While AMD has been taking server CPU share from Intel (NASDAQ:INTC), Nvidia remains the 800-pound gorilla in AI. Nvidia’s first-mover advantage makes it a formidable competitor. If Nvidia extends its lead, it could cap AMD’s growth potential.

Analysts are also less bullish on AMD compared to other AI-exposed chipmakers. A recent Citi survey found AMD among the “most unpopular” semiconductor stocks, with Nvidia and Broadcom (NASDAQ:AVGO) being the favorites. This sentiment overhang could weigh on AMD’s stock performance in the coming months.

Valuation is another concern. At 41x forward earnings, AMD trades at a very big premium. While the company’s growth prospects arguably justify this multiple, any hiccups in the AI or PC recovery narratives could lead to a sharp pullback.

AMD’s Long-Term AI Opportunity Could Be Its Only ‘Trump Card’

Profitability will become an increasingly important consideration as more startups rush AI. Well, it already is. Data and cloud may be profitable for Big Tech, but AI models may not be. No one knows if the productivity boost from these models outweighs the billions being poured in.

If Wall Street starts demanding profits from AI startups, this is where AMD could have an advantage. The company has a history of undercutting rivals on price while delivering competitive performance. We saw this play out in the CPU market where AMD’s Ryzen and EPYC chips took significant share from Intel.

I expect a similar dynamic to unfold in the AI accelerator space. Cash-strapped AI startups will be drawn to AMD’s more affordable offerings as they look to stretch their venture funding. Even larger companies may opt for AMD’s MI300 over Nvidia’s H100 if the performance delta is small enough.

In the long term, I believe AMD can sustain annual revenue growth of 15% to 20% as it rides the AI wave and continues to gain share in PCs and servers. Most analysts think the same. Gross margins should also trend higher as the mix shifts towards higher-value products. If AMD can execute on this vision, the stock could easily double or triple from current levels. That sounds great, but that will take a long time, and other semiconductor companies could deliver a lot more if things don’t play out as I expect them to.

The Bottom Line on AMD Stock

I’m very optimistic about AMD’s long-term future. The company has the right products to capitalize on secular growth in AI and a recovering PC market. However, stiff competition from Nvidia and lofty near-term expectations make me a bit cautious at current levels. For investors with a multi-year time horizon, AMD is still a great bet. But don’t be surprised to see some volatility in the months ahead. You may lag behind other semi stocks. My current rating on the stock is a “Hold.”

On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.