Trade Call on AMD Based on Undervaluation and Growth Catalysts

2 days ago

Alex

"Let's start with AMD. AMD stock is down by 15% over the last month because of intense competition in data centers, not just from Nvidia, but now Google is also starting to sell their custom TPUs to other companies. And now AMD is down by almost 5% after Oracle and Broadcom's earnings. Investors are spooked because AMD trades at around 100 price to earnings ratio. But if you've been watching this channel for a while, you know that the PE ratio is a terrible valuation metric for companies with high earnings growth. AMD is expected to more than double their earnings next year, primarily from growing their data center business by around 80% per year for the next 3 to 5 years. A lot of that growth will come from AMD's massive deal with Open AI, where they'll deploy up to 6 gawatt of Instinct GPUs, which could be worth over a hundred billion in data center revenues for AMD. And like I said when this partnership was announced, the real win for AMD here is validation for their Instinct and Rockom ecosystems, which means they could see more huge deals for data center accelerators from other AI companies like Anthropic, just like we saw with Broadcom. Another benefit AMD has in this specific situation is that their revenues aren't totally tied to AI. Around 43% of AMD's revenues come from their client and gaming segment, which focus on PC CPUs, GPUs, and semi-custom chips for game consoles. This is the segment that was actually responsible for the vast majority of AMD's revenue growth last quarter because it grew by 73% year-over-year compared to their data center segment, which was up by 22%. And don't forget that around half of AMD's data center sales are from their epic line of CPUs, not their Instinct AI accelerators. I usually point that out as a negative because I want my investments to have as much exposure to AI as possible. But in this case where investors are panic selling AI stocks, it's actually an upside because AMD is very well diversified, much more than the market is currently giving them credit for. In fact, discounted cash flow models like Simply Wall Street's calculate AMD's fair value to be around 380 per share, while the stock is trading at around 210, making AMD more than 40% undervalued at today's prices. Set another way, AMD stock would have to almost double to reach its fair value today, thanks to the insane revenue and earnings growth that they're expecting over the next few years. Like I said at the start of this video, this is a big opportunity for long-term investors."

The speaker highlights AMD as an attractive trade opportunity due to its sharp undervaluation relative to DCF fair value estimates and strong growth catalysts, particularly in its data center business and AI partnerships. Despite short-term selloffs driven by broader market panic, AMD's diversified revenue sources and significant growth potential position it as a compelling long-term investment.

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