Following a sharp rebound in 2023, the capital markets have been very hot this year – with the S&P 500 a Nasdaq Composite gained 24% and 30%, respectively, from the market close on December 20.
Of course, this year's hottest investment theme — artificial intelligence (AI) — remained unchanged from 2023. Within the AI field, semiconductor stocks have produced some of the most lucrative returns over the past few years.
But one stock that doesn't seem to be enthralling investors is Nvidiamain opponent, Advanced Micro Devices(NASDAQ: AMD). As of this writing, shares of AMD are down 19% this year. Compared to Nvidia's 172% return, investing in AMD looks like a tough sell.
Below, I'll analyze some of the factors influencing AMD's price action and assess whether now is a good opportunity to buy the dip in AMD stock as it is. trading near a 52-week low.
At the end of October, AMD announced financial results for its third quarter. The company's revenue of $6.8 billion was only up 18% year over year. While this might look ordinary compared to other AI darlings, I would encourage investors to look a little deeper.
AMD reports revenue into four major categories: data center, client, gaming, and embedded. During the third quarter, AMD's gaming and embedded segments declined 69% and 25%, respectively, year over year. On the other hand, the company's client segment grew by 29% while the data center business rose by 122% year on year.
With such a difference among its different businesses, AMD's total revenue growth of 18% looks more reasonable. Furthermore, one aspect that I think is being overlooked is that AMD's data center business is growing at a pace commensurate with Nvidia's. This is not a dynamic that I would rule out, and below I will detail why.
Image source: Getty Images.
Nvidia's biggest advantage in the AI arms race may not be its technological chops. Rather, for the better part of a year Nvidia had no competition in the graphics processing unit (GPU) market. This first mover advantage allowed Nvidia to achieve massive levels of pricing power as demand for chip goods steadily rose on the heels of increased investment in productive AI.
However, AMD's foray into the data center GPU market is clearly starting to bear fruit. Both Microsoft a Meta Platformswho are known customers of Nvidia, also supplement their chip stack with AMD's MI300 accelerators.
Given that AMD has new lines of GPUs scheduled to be released next year and through 2026, I'm cautiously optimistic that the company will be able to eat away at Nvidia's dominant market share in the long run. for companies to seek to differentiate their AI investments rather than relying on a single provider.
One valuation metric that can be useful in determining whether a stock is fairly priced is the PEG ratio. Unlike the price-to-earnings multiple, the PEG ratio looks at earnings growth over a forecast period (ie, five years). Generally, a PEG lower than 1 suggests that a stock may be undervalued. Currently, AMD's PEG ratio is 0.31 – suggesting that the stock is trading at a deep discount.
Taking this a step further, AMD currently trades at a price-to-earnings (P/E) multiple of roughly 24 – basically in line with the S&P 500.
These valuation trends could suggest that investors have lost enthusiasm for AMD and no longer view the company as a profitable growth opportunity. Looking at it another way, investors seem to value an investment in AMD as no different than dumping some cash into the S&P 500.
To me, the sour feeling around AMD is largely unnecessary. Although the company is indeed behind in some areas of the business, its potential in the GPU space alone should make up for the losses shown in non-core operations such as gaming.
Investors currently have a rare opportunity to buy a leading chip company at some of its lowest prices in quite some time. In my eyes, AMD is a bargain at its current valuation and I think now is an incredible opportunity to take advantage of its selloff and prepare to hold for the long term as its momentum is just beginning.
When our team of analysts has a stock tip, it can pay to listen. after all, Stock Advisor average total return is 912% — a market-shattering performance compared to 174% for the S&P 500.*
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco He has positions at Meta Platforms, Microsoft, and Nvidia. The Motley Fool has posts 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.
