Here's the Next AI Stock I'm Buying

I haven't added too many artificial intelligence (AI) stocks to my portfolio -- yet. To put it mildly, some of the valuations in the megacap tech stocks have been difficult to justify, especially since I consider myself a value investor at heart.

However, that's about to change in a big way. Chipmaker Advanced Micro Devices (NASDAQ: AMD), typically known by its initials AMD, has been beaten down over the past year or so, and is starting to look -- dare I say it -- cheap. Here's why I'm planning to open a significant position in AMD in my portfolio very shortly, and what I'll be watching going forward.

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Several growth opportunities

AMD is often overlooked because of its distant-second market share to Nvidia when it comes to GPUs (graphics processing units) for data centers and other AI applications.

First, while it's certainly true that AMD is a distant second in this market, the data center GPU space is big enough to have multiple winners. AMD's data center segment grew revenue by 94% year over year in 2024 and made up about half of the company's total revenue.

AMD has picked up some impressive customers, such as IBM, which recently announced plans to use AMD's Instinct MI300X accelerators for generative AI applications. Plus, the data center industry itself is expected to grow by 140% by 2030, which should create a long-tailed stream of opportunities.

Second, and most important, the data center business is just one part of what AMD does. Most notably, AMD is also a leading manufacturer of CPUs (central processing units) for laptop and desktop PCs, and just recently announced several new models from its Ryzen processor line. It develops GPUs specifically for gaming systems. And it makes chips for several other applications, such as for autonomous vehicles, a massive opportunity all by itself.

AMD also has an excellent balance sheet, with over $5 billion in cash and very little debt, which gives it the flexibility to pursue growth opportunities and allocate capital where it will deliver the best returns.

Recent results have been strong. Revenue grew 24% year over year in the fourth quarter of 2024, adjusted gross margin expanded by 300 basis points, and adjusted EPS increased by an impressive 42%.

A proven winner at a discount

AMD has established an excellent track record since CEO Lisa Su took the helm in 2014. At the time, AMD was often thought of as the cheaper alternative to Intel when it came to PCs and was a generally small chipmaker. However, Su and her team completely revamped the business and have done a great job of capitalizing on the AI boom. In fact, AMD more than doubled its share of the CPU market from 11% the year Su took over to 24% in 2024 -- and there could be more room to grow.

Long-term investors have been handsomely rewarded. AMD has delivered a total return of more than 3,000% in just over a decade under Su's leadership (and now has a market cap 70% greater than Intel's).

AMD has several different growth levers, a massive market opportunity, and an excellent history of smart product decisions. With the stock trading for just 23 times forward earnings and at a discount of about 50% from its 52-week high, I'm excited to add this chipmaker to my portfolio in the very near future.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, International Business Machines, and Nvidia. The Motley Fool recommends the following options: short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.