After a strong rally in 2023, capital markets have been on fire this year, with the S&P 500 and Nasdaq Composite gaining 24% and 30%, respectively, at the market close on December 20.
Of course, this year’s hottest investment topic, artificial intelligence (AI), remains unchanged from 2023. Within the AI space, semiconductor stocks have generated some of the most lucrative returns in recent years .
But one stock that doesn’t seem to captivate investors is NVIDIAThe main rival of Advanced Microdevices(NASDAQ:AMD). As of this writing, AMD stock is down 19% this year. Compared to Nvidia’s return of 172%, investing in AMD seems like a tough sell.
Below, I’ll break down some of the factors that are influencing AMD’s price action and evaluate whether now is a good opportunity to buy the dip in AMD stock as it is trading near a 52-week low.
In late October, AMD announced its third quarter financial results. The company’s revenue of $6.8 billion was only up 18% year over year. While this may seem mundane compared to other AI darlings, I encourage investors to dig a little deeper.
AMD reports revenue in four main categories: data center, client, gaming and embedded. During the third quarter, AMD’s embedded and gaming segments declined 69% and 25%, respectively, year over year. On the other hand, the company’s customer segment increased 29%, while the data center business increased 122% year over year.
With such a wide disparity between its various businesses, AMD’s total revenue growth of 18% seems more reasonable. Also, one aspect that I think is overlooked is that AMD’s data center business is growing at a rate proportional to Nvidia’s. This is not a dynamic I would rule out, and I will detail why below.
Image source: Getty Images.
Nvidia’s biggest advantage in the AI arms race may not be its technological prowess. Rather, for most of the year, Nvidia had no competition in the graphics processing unit (GPU) market. This first-mover advantage allowed Nvidia to achieve enormous levels of pricing power as demand for chips steadily increased following increased investment in generative AI.
However, AMD’s foray into the data center GPU market is clearly starting to bear fruit. Both microsoft and Metaplatformswhich are known Nvidia customers, are also supplementing their chip stack with AMD’s MI300 accelerators.
Considering AMD has new GPU lines scheduled to launch next year and into 2026, I’m cautiously optimistic that the company will be able to gobble up Nvidia’s significant market share over the long term as companies look to differentiate their investments in AI instead of depending on them. in a single supplier.
One valuation metric that can be useful in determining whether a stock is fairly priced is the PEG ratio. Unlike the price-earnings multiple, the PEG ratio looks at earnings growth over a forecast period (i.e. five years). Generally speaking, a PEG less than 1 implies that a stock may be undervalued. Right now, AMD’s PEG ratio is 0.31, which implies the stock is trading at a deep discount.
Taking this a step further, AMD currently trades at a forward price-to-earnings (P/E) multiple of about 24, essentially in line with the S&P 500.
These valuation trends could imply that investors have lost enthusiasm for AMD and no longer view the company as a lucrative growth opportunity. Looked at another way, investors appear to be valuing an investment in AMD as similar to investing some cash in the S&P 500.
To me, the bitter sentiment around AMD is largely unwarranted. While the company is indeed lagging in some areas of the business, its potential in the GPU space alone should more than offset the losses exhibited in non-core operations, such as gaming.
Investors currently have a unique opportunity to buy a leading chip company at one of its lowest prices in quite some time. In my opinion, AMD is a bargain at its current valuation and I think now is an incredible opportunity to take advantage of its sell-off and prepare to hold on for the long term as its momentum is just beginning.
When our team of analysts has a stock tip, it can pay to listen. After all, stock advisor The average total return is 912%, an overwhelming market outperformance compared to 174% for the S&P 500.*
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*Stock Advisor returns from December 23, 2024
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Meta Platforms, Microsoft and Nvidia. The Motley Fool has posts and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Should You Buy AMD Stock Dip? was originally published by The Motley Fool
