AMD Faces Challenges in the AI Chip Market
Advanced Micro Devices (NASDAQ: AMD) has long been a key player in the semiconductor industry, producing chips for everything from personal computers to data centers. However, while many semiconductor stocks have soared due to the rise of artificial intelligence (AI), AMD has lagged behind. The company’s share price has decreased nearly 8% over the last three years, in stark contrast to rival Nvidia, whose shares have jumped over 414% as of now.
Given AMD’s recent struggles and its potential in the AI chip market, is this stock a good investment choice today? Let’s delve deeper to find out.
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Pursuing AI Growth, Yet Falling Behind
AMD’s performance shows promise in some areas. The company reported an 18% increase in sales for the third quarter ending September 28, while diluted GAAP earnings per share surged 161% to $0.47.
Although AMD is not as dominant in GPUs as Nvidia, its processors still play a significant role in the market. For instance, AMD’s data center revenue grew 122% year over year, reaching $3.5 billion in the latest quarter, with management predicting total data center sales will exceed $5 billion for the entire year.
This growth is fueled by companies investing heavily in advanced AI data centers. Nvidia’s CEO Jensen Huang estimates that global spending in this sector will reach $2 trillion over the next five years. Nonetheless, AMD’s growth pales in comparison to Nvidia’s market power.
Nvidia commands an estimated 70% to 95% of the AI accelerator sector, leaving AMD with limited opportunities to compete effectively. Although AMD’s data center sales are impressive, the company is unlikely to catch up to Nvidia anytime soon, making it a less appealing investment option compared to its rival.
Identifying Growth and Declines in AMD’s Segments
AMD operates through four business segments, and the current situation is mixed. While the AI and client processor segments are growing, the gaming and embedded processor segments are not. Gaming revenue plummeted 69% year over year to $462 million, and embedded sales dropped 25% to $927 million.
With half of AMD’s revenue segments showing declines, there are concerns for potential investors. Furthermore, AMD’s stock is currently pricey, characterized by a price-to-earnings ratio of 112. In comparison, Nvidia’s ratio stands at 55, and the S&P 500 sits around 30.
The AI sector is crowded with high-priced stocks due to their swift share-price increases, but AMD has not benefited in the same way. Purchasing an expensive stock usually requires a competitive edge or leading market presence, which AMD currently lacks.
Advice for Investors: Take a Cautious Approach
While it’s clear why investors might consider AMD a buy—given its involvement in AI-related projects—the stock may not be the best choice at this moment. AMD is significantly trailing Nvidia in the AI processing market and its stock comes with a high price tag.
For these reasons, keeping AMD on your watchlist might be the best approach for now, as you await improvements in its market position.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
