AMD’s Growth in AI Chips Amid Strong Demand and Market Shifts

Advanced Micro Devices (NASDAQ: AMD) continues to be a top supplier of chips for data centers, personal computers, and automobiles. Currently, the company focuses on its data center segment, striving to compete effectively with Nvidia in the graphics processing unit (GPU) market, especially as it pertains to the expanding artificial intelligence (AI) sector.

Since launching its first AI GPU, the Instinct MI300 series, in late 2023, AMD has attracted several major customers from Nvidia’s client base. Notably, last month, data center leader Oracle placed a significant multibillion-dollar order for one of AMD’s upcoming GPUs, which is yet to be released.

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Oracle’s Major Investment in AMD’s Chips

AMD’s inaugural AI GPU, the MI300X, aims to challenge Nvidia’s H100, which has led the industry in 2023 and much of 2024. This GPU has already gained interest from notable customers like Oracle, Microsoft, and Meta Platforms. These clients are experiencing improved performance and reduced costs compared to the H100. In response to emerging competition, AMD has launched the more powerful MI325X and plans to unveil the MI350 series this year.

To enhance AI software capabilities, developers require more processing power for larger models. Oracle’s Gen2 cloud data centers are recognized as among the most efficient globally for AI training and inference. They utilize the latest GPUs from both Nvidia and AMD and leverage Oracle’s random direct memory access (RDMA) networking technology, allowing for rapid data transfer.

Since AI developers generally pay for computing power by the minute, faster processing yields significant cost efficiencies. As a result, leading organizations such as OpenAI, Cohere, Meta, and Elon Musk’s xAI are adopting the Gen2 infrastructure.

During a March 10 conference call, Oracle chairman Larry Ellison confirmed a multibillion-dollar order for 30,000 MI355X GPUs from AMD, despite the fact that these chips are still undergoing production and will not begin to ship in volume until later this year.

Oracle’s eagerness to secure these GPUs stems from the MI355X’s design, which utilizes AMD’s new CDNA (Compute DNA) 4 architecture—offering 35 times the performance of older CNDA 3-based chips like the MI300X. Consequently, these chips are expected to potentially match or surpass the capabilities of Nvidia’s latest Blackwell offerings, widely regarded as the current standard in AI development.

Record Year for AMD’s Data Center Business

In 2024, AMD achieved total revenue of $25.8 billion, with its data center business accounting for nearly half at an unprecedented $12.6 billion—an impressive 94% increase from the previous year.

According to AMD CEO Lisa Su, GPU sales alone generated $5 billion within the data center segment, a figure she anticipates could grow to tens of billions in the coming years, bolstered by orders like Oracle’s for the MI355X GPUs.

Additionally, AMD has emerged as a significant supplier of AI chips for personal computers, which contributed to a record $7 billion revenue within its “client” segment in 2024—up 52% from 2023. This growth will be crucial as AMD’s chips facilitate more AI workloads directly on devices, reducing the reliance on external data centers and enhancing user experience with AI applications.

Conversely, AMD’s revenue from its gaming and embedded segments declined, dropping by 58% and 33%, respectively. However, the gaming division is poised for recovery with the recent launch of the Radeon 9070 GPU, which has garnered positive reviews. The outlook for the embedded segment remains uncertain, but growth is projected for 2025.

AMD Stock Currently Appears Attractive

AMD reported a non-GAAP (generally accepted accounting principles) earnings per share (EPS) of $3.31 in 2024, leading to a price-to-earnings (P/E) ratio of 31.2. This positions AMD as more affordable compared to Nvidia, which has a P/E ratio of 36.7.

Moreover, forecasts from Yahoo! Finance indicate that AMD’s EPS could reach $4.67 by 2025, suggesting a forward P/E ratio of 22.1. This means that AMD’s stock would need to increase by 41% this year to maintain its existing P/E ratio of 31.2.

Looking ahead to 2025, spending in AI data centers is on track for a record year. Major companies, including Amazon, Alphabet, Microsoft, and Meta Platforms, plan to invest over $300 billion combined in infrastructure and chips by year-end, excluding expenditures from other AI titans like Oracle and OpenAI.

Given AMD’s current valuation, robust growth in data center revenues, and the anticipated developments in 2025, investors may find this an opportune moment to consider buying the Stock.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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. Anthony Di Pizio has positions in options related to Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool also recommends options related to Microsoft. The Motley Fool has a disclosure policy.

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