Advanced Micro Devices (AMD) reported fourth-quarter revenue that beat Street estimates, but its first-quarter guidance fell short. Argus Director of Research Jim Kelleher joins Yahoo Finance Live to discuss the results. Kelleher notes the company’s stock is up 20% year-to-date, and says that performance “the freight train” is hard to ignore.

Kelleher states that sectors of AMD including gaming and datacenter are faring differently, and suggests looking at each sector instead of lumping them together, "It's really a tale of two forecasts.”

Watch the video above to find out why Kelleher says AMD has a "leg up" on many rivals when it comes to AI.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Eyek Ntekim

Video Transcript

[AUDIO LOGO]

JULIE HYMAN: Shares of AMD, well, it's a moment by moment situation here. The shares were slightly higher. Now they're dipping lower by about 2/3, but really they've been bouncing around here. This is after the company topped revenue estimates in its fourth quarter. Its earnings per share were in line, but the forecast for the current quarter came in lower than estimated by analysts.

Here to break down the numbers further, Jim Kelleher, Argus Director of Research. Jim, I can't figure out what to make of the numbers but really the stock reaction as well. It seemed to me that it would have gotten punished for this forecast miss. And yet it's not necessarily. What do you think?

JIM KELLEHER: Hi, Julie. And good afternoon. All the things you talked about before with Josh are in play here. Certainly, the fact the stock's up 20% year-to-date. And 140% year-to-date may tempt some investors to take profits on the lackluster guidance. On the other hand, it's kind of hard to jump off that winner or get out of the way of that freight train, because the stock seems to be doing so well.

JOSH LIPTON: But, Jim, when you look at this forecast let me just ask you, you're an AMD bull, does it get you any concern when you see a forecast like that, Jim, about just AMD's bread and butter markets-- you know, PCs, servers, game consoles?

JIM KELLEHER: So it's really a tale of two forecasts. I think the data center business really surprised on the upside in the current quarter grew a little more sharply than I expected. And the client business did great, didn't do quite as well as thought. But both gaming and embedded were down. Now gaming, no surprise, I mean, you know, PlayStation 5, Microsoft Xbox, current iteration, they're very long in the tooth. And you probably need a combination of a new console, a new series of consoles and also maybe a little more favorable interest rate inflation environment to get consumers buying again.

And now the embedded business, what we're seeing that business is sensitive to non-technology markets. And we've seen a kind of rippling weakness that originally was in consumer devices ripple into the industrial and automotive sector served by embedded-- both embedded in gaming. I have them down significantly on a sequential basis on an annual basis in 1Q.

But we'll probably still see continued strength in gaming and continued strength in client. And, you know, there have been share gains in both markets over the years. So yes, a mixed message on the guide, but part of it does reflect the macro economy outside of the technology economy.

JULIE HYMAN: Well, it was interesting, because something sort of similar happened last quarter where the numbers in the forecast weren't that impressive, but it was more the commentary around the trajectory of the company. Do you think that's still kind of what's going on? And at what point is AMD going to have to actually put up some numbers that will meet all these lofty expectations?

JIM KELLEHER: Well, you know, what I think is important-- again, recovery embedded in gaming is not really what investors are looking at very hard. 2023 was kind of the vaporware year in AI for AMD. They introduced the instinct accelerators. They-- at the end of the year, they introduced the 840 Series of Ryzen mobile processors. And echoing what your prior guest had to say, on device AI is a really, really big mover. He mentioned it in terms of Qualcomm.

This means that companies like Qualcomm, Apple with the bionic processor, Intel with their new core series, and now AMD are really focused on this, having a neural processing unit right on the and GPU multicore, you know, right on the processor. So that's going to be a big thing. On-device AI is probably going to be a very big thing this year.

JOSH LIPTON: And, Jim--

JIM KELLEHER: But basically also getting that accelerator to get to what, you know, Dr. Su's target of $2 billion in data center revenue this year. That's going to be the big hurdle and that's going to be the real proving ground for the stock this year.

JOSH LIPTON: I wanted to ask you about just that point, Jim. You know, Lisa Su giving you that forecast, $2 billion in sales of AI chips in 2024. So I know some of your colleagues on the Street, Jim, they thought that was perhaps conservative. You know, what's your sense? Do you think that's conservative, do you think there's upside there?

JIM KELLEHER: Well, think about it, this was a sub $2 stock in 2015. It's $180 stock the other day. They've been fighting two dragons. They took a lot share and the X86 CPU space from Intel, although Intel was kind of asleep at the switch during a lot of that. There's no way you can say that Nvidia is not aware of AMD as a competitor here. So it'll be a tough fight.

But because of their expertise in the GPU space and the Radeon-- success of Radeon gaming technology, and that gives them a leg up over many, many other companies as they try to push into this, you know, GPU compute and AI acceleration space. So I wouldn't count them out. It's really difficult to gauge the market. Everything we've heard so far, to me, hinges on the ability for cloud service providers to deliver AI as a service.

So it's a bit of a symbiotic growth phase. But, you know, right now, the demand for enterprises is through the roof for AI enabling chips. So we'll see how it goes. But I don't think-- I think I'll hedge my bet on saying whether $2 billion is a realistic target or not. We'll see how that plays out in the early days. But there are very few companies that can go into this space and go toe to toe with Nvidia. And AMD is one of them.

JULIE HYMAN: Well, speaking of targets, it's my understanding you have $170 price target. That's where it is. And as you said, the shares were recently at $180. Are you going to-- so what's going to give here, is it fully valued where it is or do you have to increase the price target?

JIM KELLEHER: So we'll have our note out tomorrow. And it'll be on all platforms, including Yahoo Finance Professional. And then you'll see our targets our earnings estimates, our rating, et cetera. But I would say that the fact that they're succeeding in core markets and particularly gaining momentum in data center after something like 1% growth in the third quarter, shooting up to, you know, 40 something percent growth in data center in this year-end quarter and then predicting sequential momentum, that's what investors are looking for. That's really where the focus is right now.

Client is important, too, because that's a big moneymaker for them. So those parts of the business seem to be working well.

JOSH LIPTON: All right. Jim, thank you so much for joining us today. Really appreciate that time and insight on all things AMD.

JIM KELLEHER: Great. Josh, Julie, have a great evening.

JOSH LIPTON: You, too.