Is Advanced Micro Devices Stock a Buy?

One of the more tantalizing stocks following the recent market sell-off is Advanced Micro Devices (NASDAQ: AMD). Shares are down about 40% over the past year as of this writing, despite the chipmaker's strong revenue growth related to artificial intelligence (AI) over the past year.

However, the question is: Can AMD's stock bounce back and be a worthwhile investment.

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Strong AI growth

When investors look at AMD, they tend to focus on the company's position as the No. 2 player in graphics processing units (GPUs) behind leader Nvidia. Given how successful Nvidia has been, it is tempting to imagine AMD eventually capturing more market share and competing better versus Nvidia.

The company is a very distant second in terms of market share in a huge and growing market for GPUs, which are used to help train AI models and run inference. For much of 2024, it had about a 10% market share compared to around 90% for Nvidia.

The company has tried to close the gap by improving its chips and its software. However, the latter has been a big deterrent in helping it gain market share.

In December, semiconductor research company SemiAnalysis ran comparative tests on AMD's and Nvidia's chips for AI model training. It called AMD's GPUs unusable out of the box due to bugs in its software, requiring a lot of support from the company's engineers to get them up and running.

About a decade after Nvidia launched its CUDA software platform, AMD introduced its ROCm platform to help developers program its GPUs beyond their original purpose of speeding up graphics rendering.

It has been struggling to catch up ever since, often using open-source software libraries built off of ones developed by Nvidia for CUDA. Building software libraries off its competitor's platform just makes it difficult to compete from a usability perspective. As such, the company's GPUs tend to be used more often for well-defined AI inference cases.

Given the overall huge growth of the AI infrastructure market, AMD is still seeing solid gains with its GPUs. It's been having growth in inference, and overall remains an alternative to a capacity constrained Nvidia. However, at this point, taking a chunk of market share away from Nvidia seems unlikely.

Where the company has been shining is with its central processing units (CPUs). While GPUs provide much of the computing muscle, CPUs provide the "brains" -- processing information to ensure various PC hardware works optimally in tandem to achieve its functions. The company has been taking market share in the CPU data center space, reporting last quarter that its share is now well above 50% among hyperscalers (companies that own massive data centers). This market isn't as large as the GPU market, but it is still growing quickly as AI infrastructure spending continues to increase.

Overall, AMD saw its data center revenue soar 69% year over year to $3.9 billion last quarter. For the entire year, this category of revenue surged 94% to $12.6 billion.

The company has also been taking share in the personal computer (PC) space with its CPUs. Last quarter, it said it had over 70% market share on several online platforms, including Amazon, Newegg, and MindFactory.

AMD is looking to grow its PC business by a mid-single-digit percentage this year. Other areas such as gaming, where it supplies GPUs, have been weak, though, as the current gaming consoles have been on the market without a refresh for many years.

Image source: Getty Images

Is it time to buy AMD stock?

With the decline in its share price, AMD now trades at a forward price-to-earnings ratio (P/E) of 22.5 times analyst estimates for 2025. The company projected it would grow its revenue by 30% in the first quarter, with analysts estimating that it will increase sales by 23% for the year.

AMD PE ratio (forward) data by YCharts.

That's an attractive valuation for a semiconductor stock showing that type of growth.

If investors are buying AMD thinking it will take meaningful market share away from Nvidia, I think they will likely be disappointed. However, the company should still see strong growth in data centers as AI infrastructure spending continues to lift the overall chip market. It should continue to win GPU business, if just to keep Nvidia in check with prices, while it's performing well in the CPU market.

I think between its valuation and its opportunities, the stock is a buy at current levels. Just don't expect AMD to become the next Nvidia-type stock market winner.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy.