Nvidia was a $360 billion company just 18 months ago. Today it has a valuation of $3.3 trillion, and that remarkable growth is due to its data center graphics chips (GPUs), which are designed to handle artificial intelligence (AI) workloads.
While Nvidia has captured the lion’s share of the value created by AI to date, the industry is rapidly expanding and a number of other companies are joining in. Advanced micro devices (NASDAQ: AMD) is one of them; it not only developed a line of data center chips to compete with Nvidia, but also took an early lead in another crucial AI segment.
The Wall Street Journal follows 49 analysts who cover AMD stock, and the majority have given it the highest possible Buy rating. This is why investors might want to follow The Street’s lead.
AMD is laser-focused on AI right now
AMD always produced some of the most sought-after chips in the world for consumer electronics. The processors can be found in Sony‘s PlayStation 5 and Microsoft‘s Xbox Series X. They also power the infotainment systems Tesla‘s electric vehicles. Innovation is at the core of AMD, so it’s no surprise that the company is turning its attention to AI.
On the consumer side, AMD sees AI as the biggest turning point for personal computing since the Internet. The company developed a range of AI CPUs, GPUs and NPUs (neural processing units) under the Ryzen brand, and customers love them Dell And PK has already shipped millions of computers with these chips. In fact, AMD estimates that it has a 90% market share in this new market.
Generative AI applications like ChatGPT can quickly generate text, images, videos, and computer code, but require so much computing power that workloads typically bounce back and forth between the data center and the end user. AI chips will allow more of these workloads to be handled on computers and devices, creating a much faster (and more private) user experience.
On the data center side, AMD launched its MI300 series of chips last year. The MI300X is a pure GPU like Nvidia’s class-leading H100, while the MI300A combines CPU and GPU hardware to create an accelerated processing unit (APU). AMD CEO Lisa Su said more than 100 enterprise and AI customers have already deployed the MI300X GPU, including many of Nvidia’s top customers such as Microsoft and Oracle.
The MI300A, on the other hand, was selected by Lawrence Livermore National Laboratory to power its new El Capitan supercomputer, which will be used to advance everything from fusion energy to high-density physics to national security.
AMD’s AI revenues are soaring
The MI300 is the fastest growing product in AMD history, reaching $1 billion in sales within just six months of launch. It helped drive the company’s data center revenue to a record high of $2.3 billion in the recent first quarter of 2024 (ending March 31), representing an 80% increase over the same period a year ago.
Su told investors that she now expects sales of the MI300 series alone to exceed $4 billion by 2024, up from her original forecast of $3.5 billion issued in January.
Ryzen AI chips, on the other hand, boosted AMD’s Q1 Client segment revenue to $1.4 billion, marking an 85% increase from the same period a year ago. This momentum should continue as the company just released the Ryzen AI 300 Series processors, which feature the world’s most powerful NPU designed for the next generation of AI personal computers. They will power Microsoft’s new Copilot+ computers, which are purpose-built to deliver AI experiences to consumers.
Despite the strong contribution from AMD’s AI chips, the company’s total first-quarter revenue of $5.5 billion represented a year-over-year increase of just 2%. This was dragged down by slowing sales in the gaming segment, partly because demand for the PlayStation 5 and Xbox Series Sales also fell in AMD’s embedded segment, which houses its adaptive computing division with the newly acquired Xilinx. These sales are expected to improve in the second half of this year.
Wall Street is very bullish on AMD stock
The Wall Street Journal follows 49 analysts who cover AMD stock, and 35 of them have given it the highest possible Buy rating. Another four are in the overweight (bullish) camp, and ten recommend holding. No analyst recommends selling.
While this is an overwhelmingly bullish consensus, there is a caveat. Based on AMD’s non-GAAP (generally accepted accounting principles) trailing-twelve-month earnings per share of $2.67 and the current share price, the company trades at a price-to-earnings (P/E) ratio of 59.7. That makes AMD almost twice as expensive as the Nasdaq-100 technology index, which trades at a price-to-earnings ratio of 31.7.
It also means AMD stock is approaching Nvidia’s price-to-earnings ratio of 74.2, except Nvidia is showing triple-digit percentage growth at the top and bottom end to support its premium valuation. Through that lens, it’s difficult to justify AMD’s current stock price.
However, Wall Street expects AMD to post earnings of $3.51 in 2024, which puts the forward price-to-earnings ratio at a more reasonable level of 45.5. Looking to 2025, analysts think AMD could post earnings of $5.59, bringing its forward price-to-earnings ratio to just 28.5.
In other words, AMD stock looks significantly cheaper the further investors are willing to look into the future. If they can hold the stock for at least two years, they could do extremely well because it actually looks cheaper than where the Nasdaq-100 is trading today. Furthermore, AMD should reap significant rewards from its AI efforts by then.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, HP, Microsoft, Nvidia, Oracle, and Tesla. 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.
Forget Nvidia: Wall Street is bullish on another unstoppable artificial intelligence (AI) stock was originally published by The Motley Fool
