Semiconductor giant Advanced Micro Devices (NASDAQ: AMD) was among the stocks to see shares surge thanks to the rise of artificial intelligence (AI) over the past couple of years. But so far, 2025 is a different story.
The company's stock plunged to a 52-week low of $106.50 on Feb. 5, the day after it released earnings results for its fiscal fourth quarter, ended Dec. 28. This is a steep reversal from the 52-week high of $227.30 AMD shares reached last March.
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Does this price decline signal a buy opportunity, or did its earnings results reveal reasons to avoid the stock? Let's dig into the company to find out whether AMD is a worthwhile long-term investment.
AMD stock's fall after its Q4 earnings report was due in part to its all-important data center revenue failing to meet Wall Street's expectations. AI systems are built in data centers, so this area is an indicator of AMD's success in the AI market.
The company's data center segment delivered record revenue of $3.9 billion in Q4, a 69% increase over the prior year. This massive year-over-year sales growth wasn't good enough for Wall Street, which was expecting $4.2 billion in data center income.
In addition, warning bells went off on Wall Street after AMD management forecast Q1 revenue to drop around 7% to $7.1 billion from Q4's $7.7 billion due to seasonality. The quarter-over-quarter drop was interpreted as a sign AMD's AI sales are weakening.
The reality is AMD's $7.1 billion Q1 forecast is almost a 30% increase over 2024's first-quarter sales of $5.5 billion. It's also worth noting this $5.5 billion represented an 11% quarter-over-quarter decline, so the 7% drop forecast for 2025's Q1 isn't unusual.
In terms of fears that AMD's AI business is weakening, CEO Lisa Su's perspective is that AI sales are only going up. She stated, "Without guiding for a specific number in 2025, one of the comments that we made is we see this business growing to tens of billions, as we go through the next couple of years."
Su's confidence in AMD's future is understandable given the success the company has achieved to date. For instance, in 2023, data center sales were about 30% of the $22.7 billion in total revenue produced by AMD. In 2024, the data center business expanded to nearly 50% of overall sales as this segment grew 94% year over year to a record $12.6 billion. This helped AMD reach a record $25.8 billion in 2024 full-year revenue.
AMD's AI-related sales success led to solid financials. Its gross margin rose to 51% in Q4 compared to 47% in the prior year, indicating improved profitability in its core operations. The company's Q4 balance sheet was stellar with $69.2 billion in total assets compared to total liabilities of $11.7 billion.
AMD's prosperity led management to double down on its AI strategy. It acquired Silo AI last year to help customers build AI systems using AMD hardware. It's also acquiring ZT Systems this year to assist customers with implementing AMD products on IT infrastructure.
AMD's focus on its data center business, and assisting customers to implement AI, is a compelling strategy. But can AI demand continue to feed AMD's fortunes over the long run?
Forecasts estimate the AI market will grow from $244 billion in 2025 to $827 billion by 2030. The rise of AI is a secular trend expected to transform the computing industry as increasingly powerful computers capable of supporting AI become widespread.
The AI sector's expansion serves as a tailwind, helping AMD to achieve ongoing sales in its data center products. Its AI success to date, solid financials, and future prospects combine to make AMD stock a worthwhile long-term investment.
This brings me to whether now is a good time to buy AMD shares, given the stock isn't far from its 52-week low at the time of writing. Let's consider AMD's stock valuation using the price-to-earnings (P/E) ratio. This metric tells you how much investors are willing to pay for a dollar's worth of earnings.
Data by YCharts.
Because of its share price decline, AMD's P/E multiple looks more reasonable now than it has been over the past year. That said, the stock is still not a bargain. For comparison, competitor Nvidia's shares are at a P/E ratio of 53 versus AMD at over 100.
So while it's a better time to buy AMD stock than before, you might want to wait for a further price drop. Alternatively, you can adopt a dollar-cost averaging strategy, and buy a few shares now.
This approach involves building your position in AMD over time by purchasing equal dollar amounts of its stock at regular intervals. Dollar-cost averaging takes some of the guesswork out of whether AMD shares will go up or down from its current price, while allowing you to own a piece of a growing, well-run semiconductor company.
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*Stock Advisor returns as of February 3, 2025
Robert Izquierdo has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.