AMD’s numbers weren’t bad last quarter, but next year could be even better.
advanced micro device (AMD -1.25%)also known simply as AMD, recently reported financial results that didn’t seem to impress investors, even though the numbers weren’t bad at all. The stock has fallen 16% since the company released its quarterly report last week.
Investors weren’t too excited about AMD even before the earnings call. The company’s stock is down 5% this year, while rival Nvidia’s (NVDA -0.84%) Its value has soared more than 170%.
There doesn’t seem to be a lot of excitement surrounding the chipmaker, but here’s why investors shouldn’t buy up AMD stock right now.
1. Stocks remain fairly cheap relative to expected earnings growth
Contrary to market perception, AMD’s latest financial numbers were strong. Sales totaled $6.8 billion in the September quarter, an 18% increase year-over-year, and operating profit of $724 million was more than triple the $224 million AMD reported in the year-ago period.
If you’re an investor in AMD, you’re probably thinking that AMD is a good long-term investment and artificial intelligence (AI) investment to buy and hold for years, not just quarters. Probably from. In the long run, the rewards can be significant. When the price-to-earnings ratio (P/E) exceeds 100, the stock looks expensive. However, based on analyst estimates, AMD’s forward P/E ratio of 28 times is modest, lower than Nvidia’s roughly 35 times.
Future catalysts could also accelerate AMD’s growth rate, which could lead to investors paying higher multiples in the not-too-distant future.
2. AMD just started shipping MI325X chips
Even if you’re not impressed with AMD’s growth rate, there are reasons to remain bullish for the foreseeable future. That’s because the company is still in the early stages of rolling out its Instinct MI325X chip, which could offer customers a viable alternative to Nvidia’s Blackwell chips.
AMD doesn’t plan to ship in large quantities until next year. That means it could take at least a few quarters to figure out exactly what the demand for chips is and how competitive it is.
The current lack of excitement in AMD’s stock price doesn’t suggest the market is pricing in this opportunity. That could change next year if AMD’s results and guidance reflect revenue growth driven by AI-powered demand.
3. Nvidia may have the upper hand, but customers will want other options.
Nvidia has been the most-bought chip stock in recent years, but investors shouldn’t rule out AMD. Companies will look for options other than Nvidia chips. Not only are companies likely to seek alternatives to avoid relying on a single vendor, supply issues could create a greater need for AMD’s AI chips.
Judging by the current backlog, companies wanting to buy Nvidia’s Blackwell chips will have to wait more than a year. Depending on how long the shortage lasts, there could be an opportunity for AMD to offer a viable alternative and gain customers in the process.
Given the skyrocketing demand for AI chips, it’s hard not to like AMD, even if it’s a solid No. 2 player in the industry. CEO Lisa Su said, “Demand for AI is really continuing to grow and is actually exceeding expectations. It’s clear that investment rates continue to increase everywhere.”
AMD stock appears to be undervalued
The chip market is large enough for both Nvidia and AMD to coexist and generate significant revenue growth. But AI investors don’t seem to be pricing in that potential for AMD stock right now, which could be a missed opportunity. With a more favorable valuation than Nvidia, AMD is an attractive stock to buy, and investors should be careful not to overlook it. Even if you like Nvidia, owning both of these stocks for the long term may not be a bad idea.
David Jagielski has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
