After a sharp recovery in 2023, capital markets have been scorching hot this year S&P500 And Nasdaq Composite an increase of 24% and 30% respectively from market close on December 20.
Of course, this year’s hottest investment theme – artificial intelligence (AI) – remained unchanged from 2023. Within the AI ​​domain, semiconductor stocks have generated some of the most lucrative returns in recent years.
But there’s one stock that doesn’t seem to interest investors Nvidia‘s main rival, Advanced micro devices(NASDAQ: AMD). At the time of writing, AMD shares are down 19% this year. Compared to Nvidia’s return of 172%, investing in AMD seems like a tough sell.
Below, I’ll break down some of the factors impacting AMD’s price action and assess whether this is a good opportunity to buy the dip in AMD stock as it sits near a 52-week low.
At the end of October, AMD announced its third quarter financial results. The company’s revenue of $6.8 billion represented just an 18% increase year over year. While this may seem mundane compared to other AI darlings, I would encourage investors to look a little deeper.
AMD reports revenue in four main categories: data center, client, gaming and embedded. During the third quarter, AMD’s gaming and embedded segments fell 69% and 25% year over year, respectively. On the other hand, the company’s customer segment grew by 29%, while its data center business increased by 122% year-over-year.
With such a large disparity between its different businesses, AMD’s overall revenue growth of 18% seems more reasonable. In addition, I think one aspect is being overlooked: AMD’s data center business is growing at a pace commensurate with Nvidia’s. This is not a dynamic I would discount, and I’ll detail why below.
Image source: Getty Images.
Nvidia’s biggest advantage in the AI ​​arms race may not be its technological savvy. On the contrary, Nvidia had no competition in the graphics processing unit (GPU) market for the better part of a year. This first mover advantage allowed Nvidia to achieve enormous levels of pricing power as demand for chipware steadily increased due to increasing investments in generative AI.
However, AMD’s foray into the data center GPU market is clearly starting to pay off. Both Microsoft And Metaplatformsknown customers of Nvidia, are also supplementing their chip stack with AMD’s MI300 accelerators.
Given that AMD has new lines of GPUs planned for next year and through 2026, I’m cautiously optimistic that the company will be able to eat away at Nvidia’s dominant market share in the long term as companies look to differentiate their AI investments rather than can be trusted by one provider.
One valuation metric that can be useful in determining whether a stock is fairly priced is the PEG ratio. Unlike the price-to-earnings ratio, the PEG ratio looks at earnings growth over a forecast period (i.e. five years). In general, a PEG lower than 1 means a stock may be undervalued. Right now, AMD’s PEG ratio is 0.31, which implies the stock is trading at a deep discount.
Taking it a step further, AMD is currently trading at a price-to-earnings (P/E) ratio of roughly 24 – essentially in line with the S&P 500.
These valuation trends could imply that investors have lost enthusiasm for AMD and no longer view the company as a lucrative growth opportunity. Looked at another way, investors don’t seem to be pricing an AMD investment any differently than dumping some money into the S&P 500.
To me, the sour sentiment surrounding AMD is largely unfounded. While the company is indeed lagging in some areas of the business, its potential in GPUs alone should more than make up for losses in non-core businesses like gaming.
Investors currently have a rare opportunity to buy a leading chip company at one of the lowest prices in quite some time. In my view, AMD is a bargain at its current valuation and I think this is an incredible opportunity to take advantage of the sell-off and prepare to hold for the long term as the momentum is just beginning.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 912% – a market-shattering outperformance compared to 174% for the S&P 500.*
They just revealed what they think are the 10 best stocks for investors to buy now… and Advanced micro devices made the list, but there are nine other stocks you might be overlooking.
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*Stock Advisor returns December 23, 2024
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. Adam Spatacco holds positions at Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool 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.
Should You Buy the Dip in AMD Stock? was originally published by The Motley Fool
