AMD isn’t at Nvidia’s level yet, but it can still be an attractive investment.
Chip company Advanced Micro Devices (AMD 4.88%) I’ve been relegated to second place NVIDIA (NVDA -1.91%) Amid the artificial intelligence (AI) boom, the company has delivered a 40% return over the past year, which is no small feat but pales in comparison to Nvidia’s triple-digit performance.
Whether the stock price will rise further will depend on how much AI can impact AMD’s business in the coming years.
Big things are happening at AMD, and this long-term investor is going to be doing a thorough dig into the company’s financials to determine if it’s worth buying shares now.
Here’s what I found in my research into AMD:
AMD’s most important segments are doing well
No one disputes that Nvidia dominates the market for chips used in data centers that run powerful AI models. In the first quarter, Nvidia’s data center division generated revenue of more than $22 billion, beating AMD’s Entire company I’ve done it in the past 4 out of 4But there will always be niches within the broader market, and that’s where AMD can make a living.
Despite being an underdog, AMD’s data center sales grew 80% year over year in the first quarter. Additionally, AMD’s AI opportunities go beyond direct competition with Nvidia. For example, AMD is a significant player supplying chips used in personal computers and devices. This division (the client segment) saw sales growth of 85% year over year in the first quarter as computer makers began integrating AI technologies. These two fast-growing divisions account for more than half of AMD’s business.
Unfortunately, AMD’s other two segments, gaming and embedded, offset that growth with sharp declines. While management expects embedded revenue to increase once inventory issues pass, the gaming division is cyclical and in a downturn. As a result, total revenue in the first quarter was up just 2% year over year. Things could improve in the coming quarters, with analysts expecting AMD to post full-year sales of $25.5 billion, up 10% over 2023.
Achieving 10% growth this year would be a solid result, even if it looks poor next to Nvidia’s phenomenal results.
The overall picture is bright
They expect the fast-growing data center and client segments to expand and fuel AMD’s overall growth. Analysts agree, with current revenue forecasts of $32.6 billion in 2025, up 27%. And this is likely no short-term fluke, either: AMD CEO Lisa Su believes the AI chip market will grow to $400 billion by 2027.
Do the math: With an estimated 90% market share, Nvidia is on track to do just over $100 billion in data center revenue this year, meaning a significant chunk of future market share is still in its grasp as broad demand for AI chips continues to grow. If AMD were to capture just 5% of the $400 billion market, that would bring in $20 billion in data center sales, nearly double this year’s pace.
5% market share is a small number, so even a small gain over that makes a big difference. Currently, Nvidia is the overwhelming leader, but it’s hard to capture much of such a large market. What happens if AMD can’t take any more market share? That doesn’t paint the full picture, but AMD still has other divisions that generate growth. Again, their second largest business unit (Client) grew 85%.
This is not a question of whether or not there is AI.
Should I buy AMD?
Investors need to consider how much of AMD’s future growth is already priced into the stock price.
Analysts expect AMD’s earnings per share to reach $3.41 in 2024, up 28% from 2023. Additionally, annual earnings growth is projected to average 33% over the next three to five years, which would make sense if AMD’s data center and client divisions continue to grow and accelerate AMD’s overall growth. The stock is trading at 48 times projected 2024 earnings, which is generally a steep price tag for most stocks.
However, demand for AI chips is clearly increasing and has the potential to generate growth that justifies such a high initial valuation. If AMD delivers as expected and achieves these projections, investors could buy today and be happy with the results three to five years from now.
Investors should keep a close eye on AMD’s performance and keep in mind that there is increased risk to the stock if the price continues to rise from here, but investors who believe AMD can hold its own in the AI space see today as a reasonable buying opportunity.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
