Several top chip stocks have surged to new highs recently, but Advanced Micro Devices (AMD 0.10%) has trailed the pack. After surging to an all-time high of $227.30 earlier this year, the shares have fallen to $141.13 as of this writing. The pullback comes as AMD reported mixed results across various markets this year.
However, the data center business is AMD's largest revenue source, and it's growing at triple-digit rates. Growing demand for the company's advanced server chips could make the stock a compelling buy heading into 2025.
Strong growth where it matters
Revenue from data centers grew 122% year over year in Q3, driven by strong sales of AMD's EPYC central processing units (CPUs) and Instinct graphics process units (GPUs). EPYC has become a popular CPU for data centers due to its ability to deliver competitive performance while driving down the cost of ownership. It's being used by several top services, including Microsoft's Office 365, Meta's Facebook, Salesforce, Uber, and Netflix.
As for GPUs, which are essential for training artificial intelligence (AI) models, Microsoft and Meta are two of AMD's top customers using its MI300X accelerators. Management has repeatedly raised its full-year guidance for data center GPU revenue this year and now expects it to exceed $5 billion, up from the previous estimate of $2 billion at the beginning of the year .
Overall, the demand for these advanced chips is driving up profit margins with the company's adjusted earnings per share growing 33% year over year in Q3 -- outpacing the company's total revenue growth of 17%.
A looming recovery in other markets
AMD sells chips in several markets, including consumer PCs, industrial, and video game consoles. Strong demand for Ryzen processors in the consumer PC market helped drive 29% growth in Q3.
The embedded and gaming segments still have work to do. Embedded revenue was down 25% year over year, but it's showing signs of an early recovery with revenue up 8% over the previous quarter. AMD said its Versal family of adaptive system-on-a-chip (SoC) is gaining customer traction in the aerospace sector with SpaceX recently using the chips for its latest generation of broadband satellites.
"Design win momentum is very strong across our portfolio, tracking to grow more than 20% year over year in 2024 and positioning us well to grow our embedded business faster than the overall market in the coming years," CEO Lisa Su said.
Gaming revenue declined 69% year over year as Microsoft and Sony reduced channel inventory for their video game consoles. However, gaming is another market that will see better days once consumer spending recovers. Nvidia posted strong growth for its gaming business last quarter, so a recovery in gaming could be underway.
Why buy the stock
Based on the strength in the data center and client businesses, which drove 79% of the company's revenue last quarter, AMD stock is a solid buy after the recent pullback.
Of course, there's always the risk that AMD's growth slows if data center revenue starts to decelerate faster than expected. Still, if you're buying shares with the intent to hold for at least five years, the odds are on your side of earning great returns. The semiconductor industry has grown over the last several decades and should continue to do so as new devices and AI-powered software drive demand for more powerful chips.
AMD has established itself as an industry leader and has been gaining share against Intel in the server CPU market. The stock's forward price-to-earnings ratio of 27 on next year's earnings estimate already prices in soft results in the non-data center segments and should allow investors to earn excellent returns in 2025 and beyond, especially if embedded and gaming return to growth soon.
