Nvidia is the go-to provider of graphics processing units (GPUs) for processing artificial intelligence (AI) workloads in the data center. Sales are soaring, with demand from some of the world’s largest technology companies such as Microsoft And Amazon.
But Advanced micro devices (NASDAQ: AMD) has emerged as a worthy competitor, and its new datacenter GPUs are attracting some of Nvidia’s most valued customers. However, AMD also makes the most powerful chips for AI-enabled personal computers, and has established a dominant position in that market.
AMD shares are trading 29% below their all-time highs, but the company’s recent second-quarter 2024 financial report (ending June 30) suggests investors may want to buy the company now.
AMD is quickly becoming a leader in AI chips
Nvidia’s H100 datacenter GPU set the standard for AI development, and AMD launched its MI300 series last year in an attempt to compete. The MI300X is a pure GPU, while the MI300A combines GPU and CPU hardware to create an accelerated processing unit (APU).
The response has been very positive, with customers finding both performance and cost advantages in the MI300X compared to the H100. In the second quarter, MI300 sales surpassed $1 billion for the first time, and AMD raised its full-year forecast to $4.5 billion (from $4 billion just three months ago). So far, sales include Microsoft, OracleAnd Meta platformsto name a few, all of whom also buy chips from Nvidia.
But AMD can’t rest for a minute, as Nvidia is gearing up to launch next-generation chips based on its new Blackwell architecture this year, which will significantly outperform the MI300 in terms of performance. As a result, AMD is already planning to release the MI350 series in 2025. It will be built on its new Compute DNA (CDNA) 4 architecture and is said to deliver a whopping 35x the performance of previous CDNA 3-based chips (such as the MI300). The MI350 will compete directly with Nvidia’s Blackwell-based chips.
But the data center is just one part of AMD’s AI strategy. The company’s Ryzen AI chips allow PCs to handle AI workloads on the device, meaning chatbots and virtual assistants can be built into more applications. Because queries don’t have to travel through a remote data center, it creates a much faster user experience.
Earlier this year, AMD said that millions of PCs had shipped with its Ryzen AI chips, giving the company a 90% market share. But it’s building on that dominance with the new Ryzen AI 300 series for notebooks, which now boast the industry’s fastest neural processing unit (NPU). The first notebooks went on sale this past weekend, but AMD says it will launch more than 100 platforms with Ryzen AI 300 series chips in the coming quarters from leading notebook makers, including HP Inc.Acer, Asus, Lenovo and more.
Sales increase in two key segments thanks to AI
AMD generated $5.8 billion in total revenue in Q2, up just 9% from the same period last year. The real story, however, lies beneath the surface.
AMD’s data center revenue soared 115% year over year to a record $2.8 billion, powered by the MI300. The company’s client segment, home to its Ryzen AI computing chips, generated $1.5 billion in revenue, up 49%.
Despite those points of incredible strength, AMD’s headline revenue growth was weighed down by continued weakness in its gaming and embedded businesses. Gaming delivered a 59% year-over-year decline in revenue as demand for consoles like the Sony PlayStation 5 declined. The embedded segment, which contains many chips used in industrial applications, saw sales fall 41% due to high levels of existing inventory.
But investors should remain focused on the data center and client segments, which together account for 74% of AMD’s total revenue. That’s where most of the explosive AI growth will likely come from in the near future.
Why AMD Stock Is a Buy on a Dip
As I mentioned earlier, AMD just raised its forecast for data center GPU sales in 2024 to $4.5 billion. That’s a drop in the ocean compared to the opportunity the company can seize, though. Nvidia CEO Jensen Huang predicts that data center operators will spend as much as $1 trillion over the next five years to keep up with the demand from AI developers.
AMD is just getting started in the AI ​​data center market with its MI300, but if it can catch up to Nvidia’s new Blackwell chips with the MI350 next year, it will likely grab more market share. Even grabbing 10% of that $1 trillion figure would create incredible growth for AMD’s GPU sales.
That said, AMD stock isn’t cheap right now, despite its 29% drop from its all-time high. Based on non-GAAP (adjusted) earnings of $2.78 over the last 12 months, it’s trading at a price-to-earnings (P/E) ratio of 52.5. That’s a significant premium over the Nasdaq-100 index, which trades at a price-to-earnings ratio of 30.9, meaning AMD shares are overvalued.
However, the stock looks much cheaper when measured against future earnings. Wall Street predicts that AMD will generate $5.51 in earnings per share by 2025, giving the stock a forward P/E ratio of just 26.4. In other words, investors who buy the stock today and hold it for at least the next two years could earn a very handsome return.
With a market cap of just $236 billion, AMD is worth less than a tenth of Nvidia’s $2.8 trillion valuation. Given the quality of its chips and the fact that it sells to many of Nvidia’s customers, AMD stock has the potential to deliver more upside from here than its rival.
Should You Invest $1,000 in Advanced Micro Devices Now?
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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. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, HP, Meta Platforms, Microsoft, Nvidia and Oracle. 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.
Forget Nvidia: 1 Super Semiconductor Stock Drops 29% You’ll Regret Not Buying When It Dropped Originally published by The Motley Fool
