When it comes to artificial intelligence (AI) chips, Advanced micro devices(NASDAQ: AMD) continues to play second fiddle to leader Nvidia. However, it still benefits from the overall build-out of its AI infrastructure as customers will at least want to keep it Nvidia(NASDAQ: NVDA) honestly by buying some of their chips elsewhere.
Although AMD showed strong AI-related growth, investors nevertheless sold the stock. The stock is now trading in only positive territory this year.
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Let’s take a closer look at the chipmaker’s third-quarter results to see if this is a buying opportunity or if this is a sign that there could be some cracks in the AI buildout story for AMD.
For the third quarter, AMD saw its revenue increase 18% year over year to $6.8 billion. Adjusted earnings per share (EPS) came in at $0.92, an increase of 31%. That was a nice acceleration in growth from the second quarter, when revenue rose 9% and adjusted earnings per share rose 19%.
The data center business once again led the way, with revenue increasing 122% year over year to $3.5 billion and 25% sequentially. The segment was driven by sales of its Instinct graphics processing units (GPUs) and EPYC central processing units (CPUs). AMD said its EPYC CPUs have seen major deployments at major cloud companies, such as Microsoft And Metaplatformsbut also with business customers such as Adobe, BoeingAnd Nesting.
The customer segment also showed strong growth, increasing 29% to $1.9 billion. This was led by demand for its Zen 5 processors. However, gaming revenues fell sharply, 69% to $462 million, and embedded games revenues fell 25% to $927 million. Adjusted gross margins increased 250 basis points to 53.6% and increased 50 basis points sequentially.
For the quarter, AMD generated free cash flow of $496 million. It ended the quarter with net cash and short-term investments of $4.5 billion and $1.7 billion in debt.
Looking ahead, the company expected fourth-quarter revenue of $7.5 billion, good for $300 million. That would represent 22% growth at the midpoint, indicating continued acceleration. It raised full-year revenue guidance for GPU data centers from more than $4.5 billion to revenues that now exceed $5 billion.
Looking ahead to 2025, AMD said it remains positive about continued data center growth as companies continue to make significant investments to build out their infrastructure to run AI workloads. It also said customers are starting to expand their workloads using the GPUs.
Image source: Getty Images.
Like its larger rival Nvidia, AMD sees its growth driven by continued demand for the expansion of its AI infrastructure. However, the company has had more success with AI inference, although it has made some progress in large language model (LLM) training. While AMD is unlikely to challenge Nvidia’s dominance, it is carving out a nice niche. Meanwhile, given how quickly the AI infrastructure market is growing, if it can gain even a small share, it will mean big growth for the company in the future.
Its upcoming acquisition of ZTE Systems (which designs and builds servers, storage, accelerators, and other data center equipment) will help the company compete even better in the data center, allowing it to sell end-to-end system solutions that power GPUs, CPUs, and network equipment. This should also enable faster deployments, something that should attract companies racing to build out their data center infrastructure.
From a valuation perspective, AMD is trading at a forward price-to-earnings (P/E) ratio of 27.5 times analyst estimates for next year. Considering the growth opportunities ahead, that’s a pretty reasonable valuation.
AMD PE ratio (1 year ahead) chart
While I would still favor Nvidia in this area given its extraordinary growth, I do think AMD should continue to benefit from the AI-powered data center expansion. Moreover, the acquisition of ZTE could allow it to gain more ground in the field of data centers.
As such, I think investors can buy the stock during the recent dip as I see no evidence of any cracks in the AI infrastructure story.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 816% – a market-shattering outperformance compared to 167% for the S&P 500.*
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Adobe, Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Nestlé and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
AMD stock slides. Are there cracks in the AI infrastructure story? was originally published by The Motley Fool
