Investing in Advanced Micro Devices (AMD) Stock: Is Now the Time After a 51% Drop?

The stock market is currently experiencing a sell-off, with the Nasdaq Composite index down over 9% from its recent peak. In contrast, Advanced Micro Devices (AMD) has been on a downward trend for the past year, seeing a significant 51% decrease from its highest levels.

AMD is well-known for producing high-quality chips for a variety of uses, particularly its graphics processing units (GPUs) that are pivotal in data centers and artificial intelligence (AI) applications. Recently, AMD has made strides in closing the gap with Nvidia, a leading company in the GPU space.

After a record-breaking year, AMD’s data center division is expected to continue thriving. Given this backdrop, is the current 51% drop in AMD stock a prime opportunity for investors?

Potential in AI Data Center Spending by 2025

Nvidia has been dominant in the AI data center market, particularly with its H100 GPU. The company continues to set the pace with its latest H200 GPU, while demand for its upcoming Blackwell-based GB200 GPU is skyrocketing among data center operators.

At the same time, AMD has been working to catch up, launching its competitor to the H100, the MI300X GPU, in late 2023. This product has attracted notable customers like Microsoft, Meta Platforms, and Oracle, showing promising performance and cost efficiency. However, AMD's next-generation chip, the MI350, is still awaiting a full launch.

Currently, AMD is providing MI350 samples to clients, with production set to grow in the coming months. While this is a step forward, it still leaves Nvidia with a lead, as the company has already shipped many GB200 GPUs to top AI developers.

However, there is optimism surrounding the MI350. Built on the CDNA (Compute DNA) 4 architecture, it is projected to achieve significantly higher performance than its predecessors. Enhanced processing power will enable developers to manage larger datasets more effectively, thereby improving AI model efficiency. Furthermore, these advancements in chip design are crucial for reducing energy costs in data centers, a significant factor in AI operations.

Industry forecasts indicate that major firms like Meta Platforms, Microsoft, Alphabet, and Amazon are poised to invest over $300 billion collectively in data center hardware and chips by 2025. As such, the MI350's successful launch could be pivotal for AMD.

AMD's Recent Financial Performance

In terms of overall performance, AMD reported $25.8 billion in total revenue for 2024, marking a 14% increase from the previous year. More importantly, its data center revenue reached a historic $12.6 billion, reflecting an impressive 94% growth. Nevertheless, this remains dwarfed by Nvidia's $115.1 billion in data center revenue for fiscal 2025.

AMD’s CEO, Lisa Su, expressed confidence that sales of GPUs could reach tens of billions in the coming years. Outside of data centers, AMD’s client segment, home to its Ryzen AI chips for PCs, generated $7 billion in revenue—a 52% jump from the previous year. Su predicts this area will outpace market growth in 2025 as AMD captures more market share.

However, sluggish performance in gaming and embedded systems has contributed to AMD's overall revenue growth being limited to 14%. This is one reason for the significant drop in AMD’s stock price over the past year.

For instance, the gaming revenue fell by 58% in 2024, largely due to customers awaiting the release of the next-gen Radeon 9070 gaming GPU, which has just launched to positive reviews. The embedded sector also faced challenges, with a 33% drop in revenue attributed to weaknesses in various markets.

AMD Stock Valuation and Opportunity

In terms of valuation, AMD achieved $3.31 in non-GAAP earnings per share (EPS) in 2024, resulting in a price-to-earnings (P/E) ratio of 30.3. This is approximately a 19% discount compared to Nvidia’s P/E ratio of 37.7, indicating that AMD may offer good value compared to its major competitor.

Analysts forecast that AMD’s EPS could rise to $4.70 this year, suggesting a forward P/E ratio of 21.3. To maintain its current P/E ratio of 30.3, AMD's stock would need to increase more than 40% during 2025 if these earnings estimates hold true.

Given the expected massive spending in hardware from top tech companies, it’s likely that AMD’s data center division will have another successful year. Coupled with anticipated growth from its lagging gaming and embedded segments, AMD appears poised for improvement.

Thus, the recent 51% decline in AMD stock presents an attractive buying opportunity for investors looking for a chance to invest in a quality company at a favorable price. However, as the AI narrative is still developing, long-term investors may want to maintain a horizon of five years or more to fully realize their potential returns.

Stocks, Investing, AMD