AMD: Raising Our Fair Value Estimate To $130 From $115 as Data Center Acceleration Takes the Stage

We are raising our fair value estimate for narrow-moat Advanced Micro Devices AMD to $130 from $115, to reflect the firm’s significant growth opportunity ahead as it capitalizes on favorable trends in data centers, artificial intelligence, and gaming. We’re optimistic about future investments in data center and artificial intelligence products, as evidenced by rival Nvidia’s exceptional near-term outlook and the excitement around ChatGPT and large language models. AMD’s shares rose about 10% on Thursday in concert with Nvidia, but we still view AMD’s shares as modestly undervalued.

We expect AMD to achieve a top-line compound annual growth rate of 15% through 2027, which includes the acquisition of Xilinx in 2022. We are most confident in AMD’s data center segment and expect the latest 5-nanometer Genoa server CPUs to enjoy solid market share gains as Intel faced some delays to its Sapphire Rapids server CPU family. Looking ahead, we expect greater staying power for AMD in the data center as cloud and enterprise customers such as Amazon, Google, and Microsoft increase familiarity with AMD’s platform. With this, we forecast AMD’s data center sales will grow at a 29% CAGR over the next five years. Coupled with a slowdown in PC sales following robust demand in recent years from COVID-19-induced work- and learn-from-home trends, we expect AMD’s client PC segment to decline in 2023 before returning to growth in the coming years. Over the next five years, we model AMD’s client segment will grow at an 8% CAGR.

On the profitability front, Xilinx is margin-accretive to AMD’s financials, and we think the firm can achieve GAAP gross margins in the low-50% range and adjusted gross margins in the mid-50% range, in the future. In turn, we expect the firm to drive solid operating margin expansion. We model GAAP operating margin hitting 25% by 2027, while adjusted operating margin reaches 35%, in line with management’s long-term target.