AMD's stock price soared by 41%, but it is still being beaten by Nvidia. When the new product is launched, what factors are expected to drive the stock price growth?

Ultrafine Semiconductors(NASDAQ: AMD) shares rose more than 41% last year, but are still far behind Nvidia (NVDA), which completely surpassed expectations last year. Although AMD lags behind Nvidia in terms of GPUs, the company will launch new products and increase shipments of Instinct MI300X accelerators in fiscal year 2024, designed to support AI workloads. AMD is also accelerating its GPU roadmap and plans to launch new Instinct chips in the fourth quarter of 2024 and fiscal year 2025. These products will generate significant revenue and free cash flow for AMD, and help close the valuation gap between AMD and Nvidia!

Last month, AMD announced two more upcoming processors, the AMD Ryzen AI 300 series processors based on the AMD XDNA 2 architecture, and the AMD Ryzen 9000 series of desktop processors based on the AMD Zen 5 architecture. AMD is also speeding up efforts to increase its Instinct accelerator product line, which could result in huge free cash flow.

AMD will soon launch two processors, the AI 300 series for laptops (scheduled to be released July 17, 2024) and Ryzen 9000 series processors for desktops (which will begin shipping in August 2024). The AI 300 series is aimed at content creators who need to handle demanding AI workloads. Both chips can provide a tailwind and catalyst for the company's main processor business.

But more importantly, AMD said in the second quarter of 2024 that it is accelerating its GPU product line to be more competitive with Nvidia's H100. AMD already introduced the Instinct MI300X accelerator earlier this year to directly challenge Nvidia's leading position in the data center GPU market. Nvidia is far ahead in the market, which has brought the chipmaker soaring profits: profit explosions and stock splits are game changers.

Nvidia continues to have a 94% share of the data center GPU market, according to information provided by Wells Fargo. AMD's market share is just over 4%, far behind, but the increasing density of AMD's AI chip product line could effectively challenge Nvidia and take some of Nvidia's market share over the next few quarters.

I'm saying this because demand for AI GPUs is skyrocketing, and Nvidia itself can't meet that demand. As demand exceeds supply, AMD could be a huge beneficiary as it accelerates its product launch channel, and shipments of its MI300 accelerator are likely to pick up in the second quarter of 2024. AMD is also planning to release the AMD Instinct MI325X accelerator in the fourth quarter of 2024 and the AMD Instinct MI350 series in fiscal year 2025.

According to information from AMD, the MI350 series “improves AI inference performance by up to 35 times compared to the AMD Instinct MI300 series,” which may make AMD's chips more and more attractive as an alternative to the expensive H100 chips that Nvidia is selling. The AMD Instinct MI400 series is expected to debut in fiscal year 2026, which means AMD's GPU products are nearing the yearly launch cycle.

AMD said in its last earnings report that the company sees strong demand for the Instinct MI300 accelerator, and the chipmaker is expected to significantly increase free cash flow over the next few years. The company's data center GPU revenue forecast for the 2024 fiscal year is over $4 billion, and given the current strong demand for these products, it's not surprising that GPU-related revenue will double next year.

AMD's revenue in the last quarter increased by only 2% year over year, while Nvidia overtook AMD with a 262% year-on-year growth rate. However, as AMD accelerates its Instinct MI300 shipments in the second quarter of 2024, AMD's revenue and free cash flow are likely to be much stronger than the previous quarter. That doesn't mean AMD will surpass Nvidia as the leader in the data center GPU market anytime soon, but AMD's free cash flow growth potential is probably underestimated.

AMD's free cash flow last quarter was only $0.379 billion, and the free cash margin was 7%, while Nvidia's free cash flow was $14.9 billion, with a profit margin of 57%, far surpassing AMD. Despite this, AMD's free cash flow margin has increased from 4% in the fourth quarter of 2023 to the first quarter of 2024, due in part to increased shipments of high-margin Instinct MI300 processors.

As GPU-related revenue is likely to double to $8 billion next year (this is my personal estimate given the huge imbalance between supply and demand in the GPU market), AMD's free cash flow will also improve significantly. AMD's consistent revenue forecast for next year means a 28% year-over-year increase, reaching $33 billion in revenue.

The profit margin on free cash flow will increase to a modest 15%, which is not an aggressive assumption given the intensity of demand for data center GPUs, and could therefore mean that the total free cash flow potential for fiscal year 2025 is close to $5 billion. The expansion of free cash flow margins is likely mainly due to increased batch shipments of Instinct MI300 chips (and the introduction of these new CPUs) and the pricing power of data center GPUs.

Since AMD achieved only about $1.1 billion of free cash flow in fiscal year 2023, the chipmaker's free cash flow is likely to be four times the original by the end of fiscal year 2025. In my opinion, the implied increase in AMD's free cash flow is probably underestimated because the market's main focus is on Nvidia's leading revenue growth rate and FCF profit margin.

The reason I'm bullish on AMD is mainly because it's at a disadvantage and has a lower valuation than Nvidia. In the long run, AMD's EPS is actually expected to grow faster than Nvidia, and in my opinion, this is mainly because AMD's GPU development channel has always lagged behind Nvidia. As a result, AMD has considerable potential to “catch up” and revalue.

Currently, AMD's price-earnings ratio is 29.5 times, while Nvidia's price-earnings ratio is 35.6 times, far surpassing AMD. Nvidia's data center and comprehensive revenue growth has indeed been much faster than AMD in recent quarters, but AMD is catching up, and considering the Instinct MI accelerator product line, AMD's risk profile is very attractive.

From this perspective, AMD is currently worth using as an investment option. If you are still on the sidelines, you can go to BiyaPay to search for stock codes on the platform, monitor market trends, and get on the bus at the right time; of course, if you have problems with deposits and withdrawals, you can also use the platform as a professional deposit and withdrawal tool for US and Hong Kong stocks, recharge digital currency into US or Hong Kong dollars, withdraw to bank accounts, and then deposit funds to other brokerage firms.

I believe if AMD's Instinct chip launch performs well, GPU demand remains high, and AMD sees a significant free cash flow profit catalyst associated with its accelerated Instinct accelerator pipeline, AMD's price-earnings ratio could reach 35-36 times that of Nvidia. AMD's 35-36x price-earnings ratio means a fair value range of $195-$200. The aggressive product roadmap with respect to the GPU launch and associated FCF catalyst is why I upgraded AMD's stock rating to buy.

AMD lags behind Nvidia in terms of GPU-related revenue growth and market share, but AMD does have an opportunity to close the gap with its strongest rivals by continuously introducing new Instinct chips, which came to market at a time of growing demand. Given that shipments only began in the first quarter of 2024, AMD has yet to actually benefit from the increase in Instinct MI300 accelerator sales, and the company will experience a significant increase in free cash flow in the future. If the company sees a decline in demand for its flagship Instinct MI300 chip, and AMD and Nvidia see a sharp drop in GPU prices, my opinion on AMD will change.

AMD is currently at a disadvantage in the AI GPU market, while Nvidia easily controls and dominates. However, AMD is not taking it lightly and is about to launch a number of AI-focused processors, which could accelerate the company's revenue and free cash flow growth and help the chipmaker close the gap with Nvidia. Importantly, although this chipmaker's revenue isn't growing as fast as its biggest competitor in the market, I think AMD has a valuation advantage over Nvidia.

I'm optimistic about AMD's weak position in the AI market, and believe its upcoming AI-enabled processors and the new Instinct series GPUs may make AMD more attractive from a free cash flow perspective.