After Earnings, Is Advanced Micro Devices Stock a Buy, a Sell, or Fairly Valued?

Advanced Micro Devices [AMD] released its fourth quarter earnings report on February 4, 2025. Here’s Morningstar’s take on Advanced Micro Devices earnings and stock.

Key Morningstar Metrics for AMD

• Fair Value Estimate: $140.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of AMD’s Earnings

Advanced Micro Devices AMD reported strong fourth-quarter results, with nice growth in client and data center revenue and a rebound in gaming revenue. However, all investor eyes are on the artificial intelligence accelerator, and on this front, AMD provided a disappointing growth forecast. AI GPU revenue in the first half of 2025 will be on par with what AMD earned in the second half of 2024. The firm expects AI GPU growth in the second half of 2025 and beyond, but concerningly, this business isn’t on the same exponential growth trajectory as seen by its rival Nvidia NVDA amid the AI “Gold Rush.”

We cut our fair value estimate to $140 per share from $160. We’re pleased with AMD’s x86 processor share gains in servers and PCs, but we are now less optimistic about AI GPU growth. Shares still appear undervalued, as we anticipate that AMD will achieve decent long-term AI GPU growth and carve out a piece of the AI market over time. Still, we see further downside scenarios if AMD can’t deliver compelling AI solutions over time.

AMD’s revenue in the December quarter was $7.66 billion, up 12% sequentially, up 24% year over year, and above the midpoint of guidance of $7.50 billion. Client revenue, which includes x86 PC CPUs, rose 23% sequentially and 58% year over year, as we believe AMD’s market share gains over Intel INTC are accelerating. Data center revenue rose 9% sequentially and 69% year over year. The x86 server CPU business rose about 10% quarter over quarter to just under $2 billion, by our estimate. In turn, we believe the AI GPU business rose sequentially from about $1.65 billion in the September quarter to just under $1.8 billion in the December one.

Fair Value Estimate for AMD

With its 4-star rating, we believe AMD’s stock is undervalued compared with our long-term fair value estimate of $140 per share which implies a 2025 adjusted price/earnings ratio of 26 times and a 3% free cash flow yield.

We expect AMD to achieve a top-line compound annual growth rate of 17% from 2025 to 2029. We model 28% growth in 2025 and 14% average annual growth from 2026 to 2029 as AMD’s data center GPU business takes off in AI applications.

We are most bullish on the data center segment, in which AMD foresees a $500 billion total available market for AI accelerators, such as GPUs, by 2028. We’re skeptical the market will indeed get this large, but we think that firms like AMD, Nvidia, and others will get close to this figure over time. Regardless, AI accelerators represent a massive opportunity for many companies, including AMD.

For AMD’s data center segment, which includes both x86 server CPUs and AI GPUs, we model a 20% revenue CAGR over the next five years.

Within this segment, we think AMD can carve out a decent portion of the AI accelerator market over time, although our expectations at the start of 2025 are less bullish than what we modeled when AMD’s GPUs were introduced in 2024. We model AMD’s AI GPU revenue reaching $7.7 billion in 2025 versus $5.0 billion earned in 2024 and nearly zero revenue earned in 2023 and prior. We model AMD reaching $16.3 billion in AI GPU revenue in 2028 and $17.9 billion in 2029. In turn, AMD’s GPU revenue should grow at a 29% CAGR over the next five years. While these estimates pale in comparison to the $100 billion-plus in revenue that Nvidia earned in calendar 2024, AI GPUs should still represent an impressive windfall for AMD in the years ahead.

In client revenue (PC CPUs), we model a 13.5% CAGR over the next five years as AMD gains market share from Intel. In gaming, AMD faced a brutal downturn in 2024. We model an 18% CAGR in the next five years but off of this trough in business conditions. We anticipate that AMD will retain its semi-custom processor business within upcoming gaming consoles released by Microsoft and Sony in the future. We model a 5% CAGR for AMD’s embedded business.

Read more about AMD’s fair value estimate.

Economic Moat Rating

We assign AMD a narrow economic moat based on intangible assets around a variety of chip designs (including those from Xilinx, which we rated as having a narrow moat before it was acquired in 2022). We think it is more likely than not that AMD will generate excess returns on capital over the next 10 years, and perhaps even longer.

AMD is perhaps best known for its CPUs for PC desktops and notebooks within its client business segment. We think that AMD has a moat in this business, not only because of chip design expertise honed over decades, but also because AMD is one of two prominent firms to hold an x86 instruction set architecture license.

Intel initially developed x86 in the 1970s and licensed the architecture to AMD to satisfy conditions from IBM that required a second source of chips. Intel and AMD are the primary licensees of x86 and owners of x86 intellectual property, as they have a cross-licensing agreement that covers the x86 patent portfolio and would be terminated if either firm were acquired or had a change of control. The exclusivity of the x86 license serves as a significant barrier to entry for other chipmakers (such as Qualcomm and Apple) that cannot make an x86 processor without a license.

For many years, effectively all PC software (including Microsoft’s Windows, Apple’s Mac operating systems, and any desktop software applications running on both operating systems) was designed for the x86 architecture. Software makers could not easily deviate from building x86-optimized applications, while Microsoft and Apple would have a heavy lift to convert their operating systems to alternate instruction sets (such as those by ARM, which is the dominant instruction set for mobile devices, used in processors from Qualcomm, Samsung, Apple’s iPhone and others). In turn, Apple (for the Mac) and PC vendors (for Windows machines) had little choice than to buy x86 processors from (mostly) Intel or (on occasion) AMD to run their PCs.

Today, however, Apple has already done the heavy lifting of converting its Mac software to ARM and has now built excellent in-house processors for its Mac lineup. Further, an increasing portion of software is hosted in the cloud and can run on multiple operating systems and isn’t tied to only x86 devices. Microsoft has dabbled in ARM-based versions of Windows and may increase these investments over time. We still think it would be a heavy lift for any on-device software makers to port their software to be compatible with ARM-based PCs, but we think the writing is on the wall here to move such software to the cloud or on to ARM-based devices like the Mac. Thus, we don’t think the x86 architecture is as moaty as it once was, although we still foresee x86-based processors from Intel and AMD as making up a significant portion of the PC market for the next several years.

Financial Strength

As of September 2024, AMD had $4.5 billion in cash and cash equivalents against total debt of $1.7 billion. AMD took on debt to acquire Xilinx, but Xilinx generates healthy cash flow, and now that AMD has gained meaningful market share in PC and server CPUs, we are comfortable that it will generate healthy free cash flow and should be able to work down its debt obligations over time. AMD does not pay a dividend but it has bought back shares in recent years as part of a share-repurchase program. We’d expect any capital distributions in the years ahead to be done via additional buybacks as part of this program.

Read more about AMD’s financial strength.

Risk and Uncertainty

We assign AMD a Morningstar Uncertainty Rating of High. AMD sees a massive opportunity to gain share in GPUs targeting AI applications, but we view Nvidia as a clear leader here with a wide economic moat in not only hardware design but also associated software tools. Even if AMD’s GPU designs are up to par (or better), we view the associated software tools as a hurdle where AMD is behind today and will need to catch up to Nvidia. Further, we expect leading hyperscale cloud computing customers to continue to invest in AI processors. Google’s Tensor processing units and Amazon’s Trainium and Inferentia chips were designed with AI workloads in mind, while Microsoft and Meta have announced semiconductor design plans.

In PCs, AMD continues to square off against Intel, the formerly dominant market leader that has lost its manufacturing edge in recent years. If Intel can regain its manufacturing lead, which it hopes to do by 2025, AMD will face a more formidable x86 foe. Additionally, if Microsoft were to continue to push its Windows PC ecosystem toward PCs with ARM-based processors, new entrants could pose credible threats to both AMD and Intel. All the while, the PC market remains cyclical, and AMD will have to navigate the cycles accordingly.

In other segments, AMD’s gaming business often faces boom-or-bust cycles along with PC demand and, more recently, the sharp rise and fall of cryptocurrency mining. AMD also has customer concentration in its semicustom business—it supplies processors into Sony’s PlayStation and Microsoft’s Xbox today, and it would be a blow to the firm if it were to miss out on either of these sockets in the next console cycle.

Read more about AMD’s risk and uncertainty.

AMD Bulls Say

• AMD has gained market share in the PC CPU market as Intel’s manufacturing prowess has hit several road bumps in recent years.
• AMD’s partnership with chip manufacturing leader TSMC, plus its adoption of a chiplet manufacturing strategy, has allowed the company to come to market with more formidable products and greater flexibility to bring new products to market quickly.
• AI offers a massive opportunity to GPU makers, and while AMD lags industry leader Nvidia, we see plenty of room in the AI market for GPU alternatives such as AMD’s products.

AMD Bears Say

• Despite AMD’s recent share gains, Intel remains the industry leader in PC CPUs and might recapture the vast majority of the market if it can deliver industry-leading manufacturing capabilities once again.
• AMD will need to improve its software capabilities to make a dent in Nvidia’s AI dominance, as Nvidia is strong in not only GPUs but associated AI software tools.
• AMD’s gaming semicustom chip business is beholden to the design cycles and launches of new gaming consoles, and it might be a couple of more years until next-generation consoles arrive.

This article was compiled by Aman Dagra.