Should you buy Advanced Micro Devices (AMD) stock?

chip company Advanced Micro Devices (AMD 4.88%) Was pushed to second place Nvidia (NVDA -1.91%) In the midst of the AI ​​craze, a 40% stock return over the past year is not negligible, but it pales in comparison to Nvidia’s triple-digit performance.

The potential for further share price gains will depend on how much of an impact AI has on AMD’s business in the coming years.

Big things are happening at AMD, and this long-term investor is scrutinizing the company’s finances to see if they’re strong enough to justify buying the stock now.

Here’s what I discovered while exploring AMD:

AMD’s Most Important Segment Is Burning

No one disputes that Nvidia dominates the market for chips used in data centers that run powerful AI models. In the first quarter, Nvidia’s data center revenue was over $22 billion, compared to AMD’s The whole company Things I did in the past 4/4. But there will always be a niche within the broader market, and that’s where AMD can survive.

AMD’s data center revenue grew 80% year-over-year in Q1, despite its weak performance. AMD’s AI opportunities also extend beyond its direct competition with Nvidia. For example, AMD plays a key role in supplying chips used in personal computers and devices. This segment (the client segment) grew revenue 85% year-over-year in Q1 as computer makers began to integrate AI technologies. These two fast-growing segments account for more than half of AMD’s business.

Unfortunately, AMD’s other two segments, Gaming and Embedded, have been offsetting that growth with steep declines. Management expects Embedded revenue to pick up once inventory issues are resolved, but Gaming is cyclical and slow. As a result, total revenue grew only 2% year-over-year in Q1. Things could improve in the coming quarters, as analysts expect AMD’s annual revenue to grow 10% to $25.5 billion in 2023.

While achieving 10% growth this year is a solid performance, it pales in comparison to Nvidia’s impressive performance.

The big picture looks bright

The fast-growing data center and client segments are expected to grow even further, accelerating AMD’s overall growth. Analysts agree. Current revenue estimates call for a 27% increase to $32.6 billion by 2025. That doesn’t seem like a short-term fluke. AMD CEO Lisa Su believes the AI ​​chip market will grow to $400 billion by 2027.

Do the math. With 90% market share, Nvidia is expected to reach just over $100 billion in data center revenue this year. That means a significant chunk of future market share is still up for grabs as demand for AI chips continues to grow. Even if AMD could grab just 5% of the $400 billion market, it would be $200 billion in data center revenue, roughly double its pace this year.

5% market share is a small number, so even a little bit better can make a big difference. Currently, Nvidia is the overwhelming leader, but it may be difficult to capture that much market share. And what if AMD can no longer take market share? Then the big picture becomes blurred, but AMD still has other business units that can generate growth. Again, the second largest business unit (client) grew 85%!

This is not to say that if it’s not AI, it’s nothing.

Should I Buy AMD?

Investors should consider how much of AMD’s future growth is priced into its stock price.

Analysts estimate that AMD will earn $3.41 per share in 2024, up 28% from 2023. They also estimate that AMD will grow its earnings by an average of 33% annually over the next three to five years, which is reasonable if AMD’s data center and client segments continue to grow and AMD’s broader growth is successfully accelerated. The stock is trading at 48 times estimated 2024 earnings, which would typically be an expensive price tag for most stocks.

However, the clear and growing demand for AI chips could generate growth that justifies such a high starting valuation. Assuming AMD delivers as expected and reaches those estimates, investors could buy today and be happy with the results in 3-5 years.

Investors should closely monitor AMD’s performance and remember that if the stock price continues to rise from here, the stock will become increasingly risky. However, those who believe AMD can and will have a place in AI are looking for a reasonable buying opportunity today.