Following a sharp rebound in 2023, the capital markets have been scorching hot this year — with the S&P 500 and Nasdaq Composite gaining 24% and 30%, respectively, as of market close on Dec. 20.
Of course, this year’s hottest investment theme — artificial intelligence (AI) — remained unchanged from 2023. Within the AI realm, semiconductor stocks have generated some of the most lucrative returns over the last couple of years.
But one stock that hasn’t seemed to captivate investors is Nvidia‘s chief rival, Advanced Micro Devices(NASDAQ: AMD). As of this writing, shares of AMD have fallen by 19% this year. When compared to Nvidia’s return of 172%, investing in AMD looks like a tough sell.
Below, I’ll break down some of the factors that are influencing AMD’s price action and assess if now is a good opportunity to buy the dip in AMD stock as it trades near a 52-week low.
In late October, AMD announced financial results for its third quarter. The company’s revenue of $6.8 billion only represented an increase of 18% year over year. While this might look mundane compared to other AI darlings, I’d encourage investors to look a little deeper.
AMD reports revenue into four major categories: data center, client, gaming, and embedded. During the third quarter, AMD’s gaming and embedded segments declined by 69% and 25%, respectively, year over year. On the other hand, the company’s client segment increased by 29% while the data center business rose 122% year over year.
With such a wide disparity among its various businesses, AMD’s total revenue growth of 18% looks more reasonable. Furthermore, one aspect I think is going overlooked is that AMD’s data center business is growing at a commensurate pace to Nvidia’s. This is not a dynamic I would discount, and below I’ll detail why.
Image source: Getty Images.
Nvidia’s biggest advantage in the AI arms race may not be its technological chops. Rather, for the better part of a year Nvidia did not have any competition in the graphics processing unit (GPU) market. This first-mover advantage allowed Nvidia to achieve enormous levels of pricing power as demand for chip ware steadily rose on the heels of rising investment in generative AI.
However, AMD’s foray into the data center GPU market is clearly beginning to bear fruit. Both Microsoft and Meta Platforms, which are known customers of Nvidia, are also complementing their chip stack with AMD’s MI300 accelerators.
Considering AMD has new lines of GPUs scheduled to release next year and through 2026, I’m cautiously optimistic that the company will be able to eat away at Nvidia’s commanding market share over the long term as companies seek to differentiate their AI investments rather than relying on a singular provider.
One valuation metric that can be helpful when determining if a stock is fairly priced is the PEG ratio. Unlike the price-to-earnings multiple, the PEG ratio looks at the growth of earnings over a forecast period (i.e., five years). Generally speaking, a PEG lower than 1 implies that a stock could be undervalued. Right now, AMD’s PEG ratio is 0.31 — implying 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 roughly 24 — essentially in line with the S&P 500.
These valuation trends could imply that investors have lost enthusiasm over AMD and no longer view the company as a lucrative growth opportunity. Looked at a different way, investors appear to be pricing an investment in AMD as no different to that of dumping some cash into the S&P 500.
To me, the sour 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 make up for the losses exhibited in non-core operations such as gaming.
Investors currently have a rare opportunity to buy a leading chip company at some of its lowest prices in quite some time. In my eyes, 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 for the long run as its momentum is just beginning.
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 912% — a market-crushing outperformance compared to 174% for the S&P 500.*
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
