Shares of Advanced Micro Devices (AMD -1.05%) fell 18.1% in 2024, according to data from S&P Global Market Intelligence.
It may seem odd that AMD fell so much in 2024 given the outperformance of some of its AI-oriented semiconductor peers. Moreover, AMD met or beat revenue and earnings expectations on every one of its earnings releases last year.
The problem, therefore, may merely have been one of too-high expectations. After all, in 2023, AMD's stock rallied 127.6%. So it may not have been surprising that AMD took a step back last year, given high bar management had to clear.
AMD's strong data center growth nevertheless disappoints
Coming off its blockbuster 2023, AMD entered 2024 trading at nearly 300 times trailing earnings and just under 45 times forward earnings expectations. Those are high valuations that didn't leave too much room for error.
In truth, it's hard to pinpoint a single cause for the stock's underperformance over the course of the year. AMD had a very strong year in its data center segment, both for traditional CPUs and the new Instinct AI GPUs that were unveiled at the end of 2023 to much fanfare.
AMD initially gave a $3.5 billion 2024 revenue target for Instinct GPUs back in January, and ramped that figure throughout the year to over $5 billion as of AMD's October third-quarter earnings release.
Still, that massive growth from a standing start wasn't enough to satisfy the high expectations of investors. Nvidia (NVDA -1.10%) still has a strong first-mover advantage in AI GPUs with multiples of Instinct's revenue. AMD also made two AI-oriented acquisitions in 2024, AI model lab Silo.ai and data center systems expert ZT Systems. While these may be excellent additions, they might have also highlighted gaps in AMD's AI portfolio it needs to fill if it wants to compete effectively against Nvidia.
Meanwhile, all major cloud companies are now investing heavily in their own custom AI accelerators. Custom AI ASICs also boomed last year, so major cloud companies now have the option of either the market leader in Nvidia or their own custom chips. Therefore, investors may be wondering where AMD's Instinct chips fit long-term, despite the very strong 2024.
Meanwhile, AMD's other segments in embedded and gaming chips struggled, with those segments in the middle of a rather severe downturn. And while AMD's client segment did well in 2024, growing 48.6% through the first nine months of the year, that largely came from market share gains, as the anticipated recovery in the PC market fizzled, or was at least delayed into 2025.
The perils of high expectations
Should investors worry about AMD's bad year? Yes and no. On the positive side, even an 18.1% decline after a 127.6% gain yields a two-year appreciation of 104.5%, which is pretty impressive. It's also not clear that the company is doing anything wrong or that it missed any opportunities last year.
Still, the competitive set is only intensifying as AMD's rivals and customers alike seek to produce their own AI chips. Meanwhile, AMD still trades at 103 times trailing earnings, though a much more reasonable 23 times 2025 estimates.
The 2024 pullback could therefore be a solid opportunity to buy AMD's stock, but the company will also have to execute at a high level to fend off rivals.
