Tech Stocks Tumble as New AI Competitors Emerge
The stock market has kicked off 2025 with some ups and downs. In the early weeks, technology stocks showed momentum fueled by excitement over artificial intelligence (AI). However, this enthusiasm was abruptly halted in late January when a Chinese startup, DeepSeek, unveiled an AI model similar to OpenAI’s ChatGPT.
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What shocked investors was DeepSeek’s claim that it developed its AI at a fraction of the cost compared to major U.S. companies like OpenAI, Anthropic, and Perplexity. As a result, technology stocks have faced significant declines, particularly those in the chip sector.
Since the news about DeepSeek surfaced, shares of Advanced Micro Devices (NASDAQ: AMD) have dropped by about 10%. Below, I will discuss some trends in AMD’s valuation and consider whether it is now a smart time to invest in the chip leader.
Recent Movements in AMD Stock
A key metric to evaluate is the forward price-to-earnings (P/E) ratio. This statistic reflects Wall Street analysts’ forecasts for a company’s future earnings, providing insight into growth prospects compared to competitors.
The table below shows AMD’s forward P/E and market capitalization at the end of each quarter over the past year:
| Category | 9/30/2023 | 12/31/2023 | 3/31/2024 | 6/30/2024 | 9/30/2024 | Current |
|---|---|---|---|---|---|---|
| Forward P/E | 24.6 | 39.4 | 53.8 | 47.4 | 30.1 | 25.6 |
| Market capitalization | $166 billion | $238 billion | $292 billion | $262 billion | $265 billion | $194 billion |
Data source: Yahoo! Finance
AMD’s current forward P/E of 25.6 aligns closely with its September 2023 level. The notable change is a $30 billion increase in market capitalization over these 15 months.
Image source: Getty Images.
AMD’s Performance Review for 2024
The following slide illustrates AMD’s revenue and operating income projections for 2024. A key point is the performance of its data center operations, which closely compete with Nvidia.
Image source: investor relations.
Last year, AMD’s data center revenue surged by 94%, reaching $12.6 billion. The company is achieving substantial operating leverage in this sector, evident from increasing profit margins. However, sluggish growth in AMD’s gaming and embedded divisions is negatively impacting overall revenue and profits, which is a concern for investors.
Reassessing AMD’s Valuation
The current forward P/E ratio suggests that analysts predict a proportional increase in earnings relative to AMD’s share price growth over the past year. This indicates that forecasts incorporate continued growth in the data center segment while also accounting for slowdowns in gaming and embedded chips.
I disagree with this balanced outlook. I believe the accelerating revenue and profits from AMD’s data center operations will surpass the underperforming segments. Currently, the market seems to value AMD’s data center income at a multiple of around 10x, resulting in a $30 billion increase in value since September 2023.
In contrast, Nvidia’s compute and networking business far exceeds AMD’s. Nvidia has witnessed a significant rise in stock value, which has greatly increased its market valuation.
With AMD’s MI300 accelerators gaining traction among major players like Microsoft and Meta Platforms, I am optimistic that AMD is positioned to become a major contender in the data center sector.
I view this moment as a prime opportunity to invest in AMD, as its current valuation appears significantly discounted compared to Nvidia.
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*Stock Advisor returns as of February 3, 2025
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
