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AMD Keeps the AI Dream Alive Enough

Advanced Micro Devices plans to end its year with a banger. Investors couldn’t wait that long to celebrate.

The chip maker more commonly known as AMD has been the second-hottest semiconductor stock this year next to Nvidia. That meant a share-price gain of 82% ahead of its second-quarter results late Tuesday—a huge jump considering the near-term pressures the company is facing from the still-sluggish market for personal computers and reduced spending on more traditional data-center components, as tech giants shift their focus to the tools needed to enable generative artificial intelligence.

AMD’s results indeed reflected that reality. Revenue slid 18% year over year to about $5.4 billion, while adjusted operating income plunged 47% to about $1.05 billion. Both were in line to slightly above Wall Street’s projections, but data-center segment revenue still showed its first decline since AMD began breaking out its results in 2021—and came in short of analysts’ projections. The one notable bright spot was revenue for the company’s segment that makes chips for PCs, which came in 23% above targets—despite plunging by more than half from a year earlier.

But AMD has a big AI story to tell. The chip maker that successfully broke through Intel’s stranglehold on the market for central processor chips used in data centers is developing a new class of graphic processors, or GPUs, designed for artificial intelligence uses in those same data centers. That will put AMD up against Nvidia, the AI chip powerhouse whose stock has outperformed AMD’s this year.

Nvidia has built up very strong barriers to entry in artificial intelligence, thanks to its years of developing the chips and necessary software libraries used by developers. But AMD is clearly feeling confident enough in its own offerings to set some rather bold targets. The company said three months ago that it expects its data-center revenue in the second half of this year to jump 50% from the first half. In its earnings call on Tuesday, it confirmed that target, but added that the bulk of the gains would come in the fourth quarter, when it launches its new GPU chip. Analysts are currently projecting $2.26 billion in data-center revenue for AMD in the fourth quarter, 37% more than that segment has ever shown since AMD began breaking out those results in 2021.

Wall Street is still mostly on board; nearly two-thirds of analysts rate AMD as a buy, according to FactSet. But that is down from 77% at the start of the year, as a few have downgraded the shares on worries about valuation ahead of a high-stakes product launch. Several note—correctly—that tech giants such as Microsoft, Google and Meta Platforms that are aggressively building up genAI capabilities would be happy to have an alternative supplier to Nvidia. And AMD Chief Executive Officer Lisa Su helped sentiment by noting in Tuesday’s call that the new data-center chips will be “accretive to our corporate gross margins.” Citigroup analyst Christopher Danely cited that as a factor in his upgrading AMD’s shares to a buy rating on Wednesday.

Still, the mixed reaction to the company’s earnings reports is an indicator of how volatile AMD is likely to be for the remainder of the year. The shares jumped more than 3% in after-hours trading on Tuesday following the results, only to slip more than 6% Wednesday morning as the broad market came under selling pressure following a major downgrade of U.S. government debt. That was still a milder reaction compared with recent drops seen by major tech names such as Netflix, Spotify and Uber that followed mixed results of their own this earnings season. In this market, being an AI arms dealer still bestows some bulletproof qualities.

Write to Dan Gallagher at dan.gallagher@wsj.com

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