All eyes have been on chip stocks over the past year amid an artificial intelligence (AI) boom. These companies develop the hardware needed to train AI models and perform intensive generative tasks, making them critical to the future of the market.
It has been a highlight Advanced micro devices (NASDAQ: AMD)with the second largest market share in graphics processing units (GPUs) – chips that can run heavy workloads for activities such as gaming, AI and cryptocurrency mining.
Analysts have repeatedly compared AMD to the market leader Nvidia, questioning whether it will see similar growth in the sector. Nvidia’s shares have skyrocketed 209% in the past year, alongside rising profits, as it has dominated the AI chip sector. AMD is still in the early stages of its AI journey, with its shares up 28% over the same period.
Although AMD initially saw significant stock growth thanks to Wall Street’s belief that it would follow in Nvidia’s footsteps, AMD’s shares have fallen about 16% over the past three months as some excitement about the company’s potential has faded.
So is it too late to buy AMD stock, or will the company prosper in the long run?
Struggling amid increasing competition
AMD published its earnings results for the first quarter of 2024 on April 30. The company posted non-GAAP (adjusted) earnings per share of $0.62, beating analyst expectations by $0.01. Meanwhile, revenue rose 2% year over year to $5.5 billion, about $20 million more than expected. While not bad, the results weren’t enough to stoke investor excitement, with AMD’s stock up just under 1% since the earnings release.
The company’s shares have struggled against comparisons to Nvidia as sales skyrocketed 262% in the same quarter, exceeding Wall Street expectations by more than $1 billion.
It wasn’t all bad news for AMD in the first quarter of 2024, with its two top-earning segments (data center and client) posting revenue growth of more than 80%. However, its gaming and embedded divisions stifled revenue growth, with sales falling 48% and 46% during the quarter.
Breaking Nvidia’s estimated 90% market share in AI GPUs will be a challenge. However, AMD certainly hasn’t given up and unveiled new AI chips earlier this month. The company’s MI325X accelerator is scheduled for release in the fourth quarter of 2024. Meanwhile, AMD has moved to an annual release for its new chip designs, which could help the company stay competitive.
Is AMD a better buy than rivals Nvidia or Intel?
Shares in AMD are up more than 3,600% over the past decade, making it undoubtedly one of the best long-term buys in recent years. However, shifts in the market have made the stock a tough bet compared to its rivals in 2024.
Nvidia’s position in the AI chip market as demand for GPUs soars suggests its stock is a reliable way to invest in the emerging market. Its dominance in AI is unlikely to falter anytime soon. In the meantime, Intel, another emerging competitor to AMD, is expanding into chip manufacturing. This move could allow Intel to benefit significantly from the rising demand for AI chips as it has the potential to become the go-to manufacturer for many companies.
Meanwhile, AMD feels somewhat in no man’s land compared to its competitors, as there is no niche in AI to dominate. The company has a lot of potential in technology, with positions in gaming, data centers, personal computers and consumer products. However, recent earnings figures have not inspired much confidence in the near future.
Furthermore, AMD’s free cash flow fell 37% over the last twelve months, indicating that investing in its business could be challenging in the near term.
Additionally, this chart shows that Nvidia and Intel shares are significantly better value than AMD, with lower price-to-earnings (P/E) ratios. The price-to-earnings ratio is a useful valuation measure that is calculated by dividing a company’s stock price by its earnings per share. And the lower the number, the better the value. In this case, AMD stock appears significantly overpriced, despite not seeing much growth this year.
History and trends in the technology market suggest that it is not too late to invest in AMD for the long term. However, for now, there are better options that can provide more reliability and value.
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Dani Cook has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has a disclosure policy.
Is it too late to buy AMD stock? was originally published by The Motley Fool
