Following a sharp rebound in 2023, capital markets have been very hot this year, along with the S&P 500 index. As of market close on Dec. 20, the Nasdaq Composite was up 24% and 30%, respectively.
Of course, this year’s hottest investment theme, artificial intelligence (AI), remains unchanged from 2023. In the AI space, semiconductor stocks have generated the most gains over the past few years.
But one stock that hasn’t fascinated investors is Nvidia’s main rival, Advanced Micro Devices. (NASDAQ: AMD). As of this writing, AMD stock is down 19% this year. Compared to Nvidia’s 172% return, investing in AMD seems tough.
Below, we’ll analyze some of the factors that are influencing AMD’s price movement and evaluate whether now is a good time to buy on the edge, with AMD stock trading near its 52-week low.
In late October, AMD announced its third quarter financial results. The company’s revenue was $6.8 billion, an increase of only 18% year over year. While it may seem mundane compared to other AI darlings, we recommend investors look a little deeper.
AMD reports revenue in four main categories: datacenter, client, gaming, and embedded. During the third quarter, AMD’s Gaming and Embedded segments were down 69% and 25% year-over-year, respectively. Meanwhile, the company’s customer division grew by 29%, and its data center business grew by 122% year-on-year.
With such large disparities between its various businesses, AMD’s 18% total revenue growth looks more reasonable. Additionally, one aspect that seems to be overlooked is that AMD’s data center business is growing at a similar pace to Nvidia’s business. This is not a dynamic I take lightly. The reason is explained in detail below.
Image source: Getty Images.
Nvidia’s biggest advantage in the AI arms race may not be its technological prowess. In fact, for most of the year, Nvidia had no competition in the graphics processing unit (GPU) market. This first-mover advantage has allowed Nvidia to achieve enormous levels of pricing power as demand for chipware steadily increases following increased investment in generative AI.
But AMD’s foray into the data center GPU market is clearly starting to bear fruit. Microsoft and Meta Platforms, both known Nvidia customers, are also supplementing their chip stacks with AMD’s MI300 accelerators.
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Given that AMD plans to release new GPUs between next year and 2026, the company is likely to see Nvidia’s dominance over the long term as companies seek to differentiate rather than rely on AI investments. I’m cautiously optimistic that it will be able to eat up a lot of market share. on a single provider.
One valuation metric that can help determine whether a stock is fairly priced is the PEG ratio. Unlike the price-to-earnings ratio, the PEG ratio focuses on earnings growth over the forecast period (i.e. five years). Generally, a PEG lower than 1 means the stock is likely undervalued. AMD currently has a PEG ratio of 0.31. This means AMD stock is trading at a deep discount.
Taking this a step further, AMD currently trades at a forward price/earnings (P/E) multiple of around 24, which is essentially 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 lucrative growth opportunity. Looking at it another way, investors seem to be pricing an investment in AMD as no different than putting cash into the S&P 500.
To me, the bad feelings about AMD are mostly unwarranted. While the company does lag in some areas of its business, its potential in the GPU space alone should more than make up for the losses seen in non-core businesses like gaming.
Investors now have a unique opportunity to buy major semiconductor companies at the lowest prices in a long time. In my eyes, AMD is a bargain at its current valuation, and its momentum is just starting, so I think now is a great opportunity to take advantage of the decline and prepare for a long-term holding.
When our analyst team has a stock tip, it’s worth listening. After all, Stock Advisor’s total average return is 912%, a market-beating outperformance compared to the S&P 500’s 174%*.
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*Stock Advisor returns as of December 23, 2024
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Adam Spatacco has held positions at Meta Platform, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
Should you buy the drop in AMD stock? Originally published by The Motley Fool
