AMD: A Hidden Opportunity Amidst the AI Stock Frenzy
After a strong comeback in 2023, the capital markets are performing exceptionally well this year. The S&P 500 and Nasdaq Composite have surged by 24% and 30%, respectively, as of market close on December 20.
The standout investment theme continues to be artificial intelligence (AI), with semiconductor stocks often at the forefront of returns over the last couple of years.
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However, not every stock has caught investors’ attention. One notable example is Advanced Micro Devices (NASDAQ: AMD), which has seen its shares drop by 19% this year. This stands in stark contrast to Nvidia, whose impressive return of 172% makes AMD look less appealing.
Here, I’ll explore the factors affecting AMD’s stock price and discuss whether it’s a good time to consider entering the market as AMD approaches a 52-week low.
A Closer Look at AMD’s Financial Results
In late October, AMD reported its third-quarter financial results, revealing a revenue of $6.8 billion, marking an 18% year-over-year increase. While this might seem lackluster compared to other AI competitors, a deeper examination is warranted.
AMD divides its revenue into four main categories: data center, client, gaming, and embedded. The third quarter showed significant declines in gaming (69%) and embedded segments (25%). However, the client segment surged by 29%, and the data center business skyrocketed by 122% year over year.
Such uneven performance across its divisions sheds light on the 18% total revenue growth, which appears more acceptable. It’s noteworthy that AMD’s data center business is expanding at a rate comparable to Nvidia’s, a fact that shouldn’t be ignored.
Image source: Getty Images.
The Competitive Landscape in AI Technology
Nvidia has enjoyed a significant edge in the AI market due to a lack of competition in the graphics processing unit (GPU) sector for nearly a year. This allowed Nvidia to command high prices as the demand for chips surged alongside increasing interest in generative AI.
However, AMD is making strides in the data center GPU market. Both Microsoft and Meta Platforms, renowned users of Nvidia products, are also adopting AMD’s MI300 accelerators to complement their technology offerings.
With new GPU lines set to launch between next year and 2026, there is a cautious optimism that AMD could chip away at Nvidia’s dominant market position as companies look to diversify their AI resources.
Evaluating AMD’s Stock Valuation
To assess if AMD stock might be undervalued, the PEG ratio serves as a useful measure. Unlike the price-to-earnings (P/E) ratio, which looks at earnings alone, the PEG ratio considers expected earnings growth over time. A PEG ratio under 1 typically suggests undervaluation. Currently, AMD’s PEG ratio is 0.31, indicating the stock is significantly discounted.
Further analysis reveals AMD’s forward P/E ratio is around 24, aligning closely with the S&P 500. This could signal that market enthusiasm for AMD has waned, and investors view AMD as offering similar returns to broader market investments.
Despite some challenges, I believe the negative sentiment around AMD may be exaggerated. While the company has areas needing improvement, its potential in the GPU market could offset losses in other segments like gaming.
Currently, investors can seize the chance to acquire shares of a leading semiconductor firm at notably low prices. In light of this valuation, I view the present moment as an excellent opportunity to buy AMD and hold it for the long haul, as its growth trajectory is just beginning.
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*Stock Advisor returns as of December 23, 2024
Randi Zuckerberg, a former market development director for Facebook and sibling to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Adam Spatacco holds positions in Meta Platforms, Microsoft, and Nvidia. The Motley Fool has shares 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 maintains a disclosure policy.
The views expressed here belong to the author and may not reflect those of Nasdaq, Inc.
