Noted investor Cathie Wood, the founder and CEO of investment management firm ARK Invest, is known for investing in companies capable of disruptive innovation. It's not surprising, therefore, that she's been loading up on shares of Advanced Micro Devices (AMD -4.76%) in 2023.
Wood's combined holding of AMD shares across ARK Invest's portfolios of exchange-traded funds (ETFs) has increased from just under 73,000 shares at the beginning of the year to 268,000 shares, as of this writing. While it may surprise some to see ARK Invest putting its money into a company that's been struggling of late due to the downturn in the global personal computer (PC) market, a closer look at the company's business suggests that ARK Invest could be making a smart long-term move.
Here's a look at the possible reasons why Wood has been bullish on AMD this year and if investors should consider buying the stock following its 57% jump in 2023.
AMD is on the verge of a turnaround
The chipmaker's results have left a lot to be desired in the first half of the year. Its revenue has fallen 14% year over year in the first six months of 2023 to $10.7 billion. This was driven mainly by a sharp contraction in its client-processor business, where revenue fell a whopping 59% year over year in the first two quarters of the year to $1.7 billion.
This business has been beaten down badly this year, thanks to weak demand in the PC market. More specifically, PC shipments were down a whopping 30% year over year in the first quarter of 2023, according to Gartner, followed by a 17% drop in Q2. These sharp declines led PC manufacturers to reduce orders for processors, causing an oversupply in the market and forcing the likes of AMD and Intel to offer discounts.
This explains why AMD slid to an operating loss of $165 million in the first half of 2023 from an operating profit of $1.5 billion in the same period last year. However, AMD's guidance for the current quarter suggests that its fortunes are about to turn around. Revenue guidance of $5.7 billion for the current quarter points to an improvement over the year-ago period's $5.56 billion.
What's more, AMD expects a non-GAAP gross margin of 51% in the current quarter, 1 percentage point higher than the reading in the year-ago quarter. Consensus estimates indicate that AMD's performance could improve further in the fourth quarter. Analysts are expecting a 14% year-over-year increase in the company's revenue to $6.4 billion, while adjusted earnings could increase 27%.
There are a few solid reasons why AMD could deliver that turnaround.
The company expects the PC market to stabilize further in the second half of 2023. As I mentioned earlier, the year-over-year decline in PC shipments slowed down substantially in the second quarter. AMD CEO Lisa Su expects "the PC market to grow seasonally with more normalized inventory levels across the supply chain" in the second half of the year.
It's expected that cooling inflation, receding chances of a recession, and the end of Windows 10 support will lead to more system upgrades, sending the PC market toward recovery in late 2023. This may be followed by a jump in shipments in 2024, according to IDC. What's more, the firm expects PC shipments to jump to 285 million units in 2027 from 252 million units this year.
Investors can expect AMD's client-processor business to regain its mojo in the second half of 2023 and head higher in 2024.
Another reason to be upbeat about AMD's prospects is the opportunity presented by artificial intelligence (AI) servers and accelerators. Foxconn projects that the sales of AI servers could hit $150 billion in 2027, compared to $30 billion in 2023.
This massive growth is going to unlock a big opportunity for AMD to tap. The good part is that it has started making progress on this front.
According to Su, several customers have "initiated or expanded programs supporting future deployments" of the company's AI chips. This explains why AMD's management is anticipating a major bump in data center revenue in the second quarter of the year. Given that the market for AI server chips is currently in its early stages of growth, it could turn out to be a key growth driver for AMD in the long run.
Why AMD stock is worth buying right now
The discussion above indicates why analysts are anticipating AMD's bottom-line growth to take off from 2024 following an anticipated decline of 22% this year. This is evident from the following chart.
AMD earnings per share (EPS) estimates for current fiscal year, data by YCharts.
A recovery in the PC market combined with the lucrative opportunity in AI-focused data center chips are two key reasons why AMD is likely to live up to Wall Street's earnings-growth expectations. That's why it may be a good time to buy AMD right now, especially considering that the stock has pulled back 15% in the past three months and is now trading at relatively attractive multiples.
AMD PE Ratio (Forward) data by YCharts.
AMD is now trading at 39x forward earnings, which is in line with its five-year average forward earnings multiple. Meanwhile, its forward earnings multiple, based on next year's earnings, is even more attractive.
Investors may want to take a page out of Cathie Wood's playbook and consider lapping up this potential AI winner before it regains its mojo and soars higher due to the catalysts discussed above.
