Semiconductor Stocks Struggle: Focus on AMD’s Growth Potential

This year has been challenging for semiconductor stocks. As of market close on April 30, the VanEck Semiconductor ETF has dropped by 13%. This figure significantly exceeds the losses of the S&P 500 during the same timeframe.

One of the most notable declines in the semiconductor sector is attributed to Nvidia, which has lost nearly $1 trillion in market value. While this decline presents a potential opportunity for growth investors, another chipmaker deserves attention: Advanced Micro Devices (NASDAQ: AMD).

Investing in AMD: A Closer Look

At around $100 per share, AMD could be a compelling option for investors, especially as artificial intelligence (AI) continues to expand. Analysts indicate that evaluating simple revenue and profit figures often overlooks important factors about a business’s potential.

In 2024, AMD recorded a 14% increase in revenue and a 92% rise in net income. Although these numbers are impressive, they do not fully capture AMD’s competitive position, especially when compared to Nvidia, which is often viewed as a superior competitor due to its larger scale and faster growth.

Understanding the nuances in AMD’s operations reveals a more encouraging narrative. The company breaks down its revenue and operating income into four segments: data center, client, gaming, and embedded. In 2024, AMD’s data center business, which includes its graphics processing units (GPUs) that compete against Nvidia, showed remarkable growth.

AMD’s data center revenue soared by 94% year over year, reaching $12.6 billion, with operating income climbing 175% to $3.5 billion. The client segment also performed well, increasing by over 5% to $7 billion and turning a profit of $897 million from a loss the previous year. However, AMD’s gaming and embedded segments saw declines of 58% and 33%, respectively, which has overshadowed the company’s overall positive performance.

Importance of AMD’s Data Center Segment

Although Nvidia remains a leader in the AI chip market, AMD is making significant strides that could alter competitive dynamics. Major AI players, including Oracle, Meta Platforms, and Microsoft, have begun utilizing AMD’s MI300 accelerators in addition to Nvidia’s offerings. As AMD rolls out next-generation GPU architectures, it is well-positioned to challenge Nvidia’s pricing strategies amid a likely forthcoming commoditization of GPUs.

Assessing AMD’s Investment Potential

Currently, AMD shares trade at a forward price-to-earnings (P/E) ratio of 22.4, which is lower than Nvidia’s. To highlight the valuation disparity, Nvidia’s market capitalization stands at $2.8 trillion, while AMD’s is considerably smaller at $160 billion. Despite Nvidia’s greater revenue and profitability, the justification for a valuation 17 times that of AMD is questionable.

AMD continues to showcase its ability to maintain profitable relationships with some of Nvidia’s largest existing clients. This underlines the company’s potential for further scaling within the data center GPU sector.

Investors might be overly focused on AMD’s overall growth figures and not factoring in the positive trends in its data center business. For approximately $100 per share, AMD offers a valuation of $160 billion, an attractive price compared to Nvidia, especially within the context of growing demand in AI infrastructure. I believe AMD is poised for success in the coming years, making its current stock price an appealing investment opportunity.

Should You Consider Investing in AMD?

Before making an investment decision regarding Stock in AMD, consider key evaluations by analyst teams. AMD was not included in a list of the 10 best stocks recommended for purchase.

For example, Netflix made the list on December 17, 2004. If you had invested $1,000 at that time, it could be worth $623,685 today!*

Additionally, Nvidia was included on April 15, 2005, and a similar $1,000 investment would now be worth $701,781!*

It should be noted that the average return from this advisory service is 906%, far exceeding the S&P 500’s 164% return. Keep an eye on stock recommendations that could potentially deliver substantial returns.

Randi Zuckerberg, a former director of market development for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board. Adam Spatacco holds positions in Meta Platforms, Microsoft, and Nvidia, while The Motley Fool has positions in AMD, Meta Platforms, Microsoft, Nvidia, and Oracle.

The views expressed herein represent the opinion of the author and may not reflect those of Nasdaq, Inc.