This Artificial Intelligence Challenger Is Down 49%. Is It Time to Buy the Dip on the Stock?

The stock market has swooned recently, but chip designer Advanced Micro Devices (NASDAQ: AMD) really took it on the chin. The S&P 500 (SNPINDEX: ^GSPC) index was reaching record prices in January. As of April 12, it trades 13% below that high point.

AMD, on the other hand, started struggling last summer. The stock has plunged 49% lower since July 10, 2024.

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You'd think AMD would be soaring these days. Artificial intelligence (AI) is the hottest ticket in this market, driving the stocks of AI specialists to all-time highs, resulting in a few trillion-dollar market caps. AMD's Instinct processors are among the most cost-effective AI accelerator chips, and the Epyc range of server-grade CPUs is perfect for controlling those beastly number-crunchers. AMD's Epyc and Instinct chips are often found together in some of the world's most powerful supercomputers.

But AMD's market makers had other ideas. Is this AI hardware challenger a great buy at these lower stock prices, or is this stock best watched from the sidelines?

Why is AMD's stock way down?

I can't blame AMD's drooping stock chart on poor business reports. The company has posted three earnings reports since the price drop started, beating analysts' average earnings estimates twice and their revenue targets in all three reports.

In all fairness, AMD wasn't the only AI hardware designer that experienced at least a short-term peak last July. The downturn was widespread. Arch rival Nvidia (NASDAQ: NVDA) saw a 22.7% share price drop from July 10 to Aug. 6. Chip-making giant Taiwan Semiconductor Manufacturing (NYSE: TSM) took an 18.7% hit. The sector-tracking PHLX Semiconductor Sector Index dipped 22.6% deeper. But AMD led the race to the bottom with a 29.2% price drop:

AMD data by YCharts

This was an early round of investor nerves regarding international chip-shipping between the U.S. and China. With 24% of AMD's sales going to Chinese customers last year, it makes sense that the company took a steep dive in this environment. Still, the downtrend covered the whole semiconductor industry at that point.

AMD's chart diverged from the chip-sector trends in December. Several banks issued bearish reports on the stock, chiefly citing weak contract wins in the booming AI market.

All things considered, AMD's disappointing stock chart over the last year was mostly inspired by rumblings in the AI arena.

Crunching the numbers on AMD's AI momentum

AMD's stock currently trades at 15 times forward earnings estimates and 5.9 times training sales. These metrics look cheap next to Nvidia's substantially higher ratios. I could also handpick different valuation multiples that lean in the opposite direction, but these two figures highlight the company's robust combination of healthy top-line growth and widening profit margins.

From this perspective, AMD's stock looks deeply undervalued today. Keep in mind that February's fourth-quarter report didn't exactly prove the AI-focused AMD bears right. The new Instinct MI300X chip is finding plenty of enterprise-class customers, thanks to its desirable combo of fairly modest prices, low electric power draws, and competitive number-crunching performance.

"AMD now powers five of the 10 fastest and 15 of the 25 most energy-efficient systems in the world, on the latest top 500 supercomputer list," CEO Lisa Su said on the earnings call. Many of these big-iron systems are directly involved in the AI market.

So I honestly don't see why so many analysts and investors are disappointed in AMD's AI prowess. The company is doing well, with the even stronger Instinct MI350X chips slated for introduction later this year.

Nvidia has a serious rival here.

Smart ways to ride AMD's roller coaster

Now, AMD's stock isn't exactly dirt cheap even after last year's deep price drop. I wouldn't recommend betting the farm on AMD stock, but it does strike me as a solid pick for a price-sensitive portfolio of AI stocks. You could also wait for even lower prices, though nobody knows how long the current market instability will last or whether AMD might take a turn for the better over the next few months.

The best philosophy might be a dollar-cost averaging plan with a series of smaller investments over time, or a similarly price-agnostic buying in thirds strategy. These methods balance out some of the market volatility, giving you a reasonable average price for your combined AMD position.

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Anders Bylund has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.