By Max A. Cherney and Arsheeya Bajwa

(Reuters) – Advanced Micro Devices on Tuesday increased its 2024 forecast for artificial intelligence chip sales by $500 million and said supplies would remain tight through 2025, sending shares of the Santa Clara, California-based company up 7.5% in extended trading.

The AI chips designed by AMD are largely bought by cloud computing giants. Industry insiders and Wall Street view AMD’s line of AI chips as one of the few potentially viable competitors to Nvidia, which dominates the market. Shares of Nvidia rose 4.7% following the AMD report.

AMD counts Meta Platforms as a customer, and Microsoft launched access to a cluster of AMD chips for AI via its cloud platform earlier this year.

Because of surging demand, AMD CEO Lisa Su said, the company boosted its 2024 AI chip revenue forecast to $4.5 billion from a previous target of $4 billion. The supply of such chips will remain tight through 2025, Su said during a quarterly results conference call late Tuesday.

In the second quarter, AMD’s data center revenue, its biggest segment, jumped 115% to $2.8 billion, just topping estimates of $2.79 billion, according to Visible Alpha. For the first time its quarterly AI chip revenue – which is largely concentrated in the data center segment – rose above $1 billion.

“We are in the picks and shovels cycle which is more about hardware infrastructure right now,” Creative Strategies CEO Ben Bajarin said, making an analogy to the California gold rush, where suppliers of mining tools profited more than some miners. “Most enterprises are spending on AI software but only to trial and pilot programs, (and have) not fully deploy them yet,” he said.

Such massive spending has not yet generated substantial returns. And on Tuesday, shares of Microsoft fell 6% as growth in its cloud-computing services missed targets, indicating it may take longer for some Big Tech firms to benefit from hefty spending on AI technology.

PC BUSINESS RECOVERY

Overall, AMD forecast revenue of $6.7 billion, plus or minus $300 million, for the third quarter, compared with analysts’ average estimate of $6.61 billion, according to LSEG data. 

On an adjusted basis, the company forecast gross margin of about 53.5% for the third quarter, compared with estimates of 53.6%.

Total revenue in the second quarter rose 9% to $5.8 billion, which came in above estimates of $5.72 billion.

AMD, which is among the largest providers of PC chips, also benefited from a recovery in the personal computer market after its worst slump in years. Computer makers hope new AI features will revive consumer demand.

“(The) PC business actually is going to do better in second half, especially, typically seasonally,” AMD finance chief Jean Hu said.

In the second quarter, AMD reported revenue for PC chips of $1.5 billion, compared with estimates of $1.43 billion, according to Visible Alpha.

The company had adjusted second-quarter earnings of 69 cents per share, topping analyst estimates of 68 cents a share.

(Reporting by Arsheeya Bajwa in Bengaluru and Max A. Cherney in San Francisco; Editing by Devika Syamnath, Peter Henderson and Cynthia Osterman)

---