Advanced Micro Devices Faces a Challenging Market But Holds Long-Term Promise

Advanced Micro Devices (NASDAQ: AMD) has seen its stock tumble 49% since reaching a peak in March 2024. Meanwhile, Nvidia has surged by about 40% during the same timeframe.

Nvidia’s Lead in AI Chips

Nvidia is a key player in the market for cutting-edge graphics processing units (GPUs), primarily used in data centers for developing artificial intelligence (AI) models. This company has experienced immense success, largely due to being a first mover, capturing a significant part of the market and boosting its market capitalization into trillions.

A strong competitor has emerged in AMD, which is making strides in data center technologies and other areas within the AI semiconductor race. The question arises: does AMD’s 49% stock decline present a golden opportunity for long-term investors?

Image source: Getty Images.

The Importance of AI Hardware Beyond GPUs

In late 2023, AMD released its MI300X data center GPU, aimed at handling AI workloads and designed to compete with Nvidia’s H100. This GPU quickly attracted major customers like Meta Platforms and Microsoft, showcasing AMD’s successful entry into the AI GPU market.

Following the MI300X, AMD introduced the MI325X last year, intended to rival Nvidia’s newer H200 GPU. AMD reports that some clients are realizing notable performance and cost benefits from the MI325X compared to its rivals, signaling positive market acceptance.

Next up is the MI350X, which will be AMD’s most advanced GPU, featuring the new Compute DNA (CDNA) 4 architecture. Analysts expect it to offer a 35-fold performance increase over the previous MI300X, positioning it against Nvidia’s superior Blackwell lineup.

Initially set for a mid-2025 launch, the MI350 series is ahead of schedule, with customer samples poised for delivery this quarter and production ramping up soon after.

However, the AI boom won’t rely solely on data centers. Companies like China-based DeepSeek are utilizing efficient training techniques, enabling the development of competitive AI models with less computing power. This transition could allow devices such as computers and smartphones to run AI software without needing extensive data center support.

AMD’s Ryzen AI 300 series chips for PCs are tailored for this shift. Currently, they are leading in both power and sales. AMD forecasts that over 100 commercial hardware platforms utilizing Ryzen AI 300 series chips will launch in 2025 from manufacturers like Microsoft, HP, Lenovo, and Asus.

This capability for on-device AI processing promises a quicker user experience and accessibility even without internet. Over time, most devices will likely be equipped to handle AI workloads, positioning AMD to benefit from a multiyear growth opportunity.

Strong Growth in AMD’s AI Revenue

AMD had a record-breaking year in 2024, reporting revenues of $25.8 billion—a year-over-year growth of 14%. However, the real insight lies in specific areas of the company’s performance.

The data center segment saw a remarkable 94% growth, totaling $12.6 billion in revenue, with GPU sales contributing over $5 billion. CEO Lisa Su initially predicted only $2 billion in GPU revenue, but the company exceeded expectations. She anticipates annual GPU revenue could reach the tens of billions in the coming years.

Meanwhile, the client segment, which includes the Ryzen AI chips, generated $7.0 billion—a 52% increase from the prior year. Su believes this sector will continue to grow at a pace exceeding the overall market throughout 2025, indicating AMD’s potential to take further market share.

Despite AMD’s overall revenue growth appearing rather modest relative to its data center and client segments, the decline in its other areas, specifically gaming and embedded segments, contributed to this perception.

The gaming segment saw revenues drop to $2.6 billion, down 58%. This downturn stems partly from market anticipation of the upcoming Radeon 9070 gaming GPU, expected to refresh sales eventually. Revenue from the embedded segment also decreased to $3.6 billion, down 33%, affected by downturns in industrial and communications markets.

Although these declines are concerning, it’s essential for investors to focus on AMD’s growing AI segments in both data centers and client markets. These areas promise substantial long-term growth.

Image source: Getty Images.

AMD Stock Offers Attractive Value

AMD’s stock fell recently after the disclosure of its full-year 2024 results, particularly due to a forecast predicting a 7% revenue decline for the first quarter of 2025, attributed to seasonal fluctuations typical in the chip market. Still, management remains optimistic about strong growth in the AI-driven data center and client divisions during the quarter.

Currently, AMD stock is hovering near its 52-week low, presenting an appealing valuation. The company reported $3.31 in adjusted earnings per share (EPS) for 2024, translating to a price-to-earnings (P/E) ratio of 32.5—significantly cheaper compared to Nvidia’s P/E of 50.8.

Furthermore, Wall Street analysts project a robust 43% increase in EPS to $4.75 for this year, pushing AMD’s forward P/E down to 22.6. In essence, the stock would need to rise by approximately 40% this year merely to maintain its current valuation.

Considering AMD’s substantial outperformance against Lisa Su’s initial GPU sales forecast, and her optimistic viewpoints for future sales, the potential for exceeding Wall Street’s expectations in 2025 seems quite plausible.

As the AI revolution is still unfolding, particularly regarding device integration, the recent 49% decline might indeed represent a compelling entry point. However, investors are advised to adopt a long-term view (five years or more) to fully capitalize on potential returns.

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Randi Zuckerberg, former director of market development at Facebook and sister of CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Anthony Di Pizio does not hold positions in any mentioned stocks. The Motley Fool endorses AMD, HP, Meta Platforms, Microsoft, and Nvidia, and has interests in options related to Microsoft. The Motley Fool operates under a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.