The 2022 stock market sell-off has been broad, but it has been particularly brutal for the technology sector. While the benchmark S&P 500 index is down by 25% year to date as of this writing, the tech-heavy Nasdaq-100 index has lost 34%.
But when you zoom out and compare their performances over the past five years, the picture looks very different. The Nasdaq-100 is up by 77%, which is nearly double the S&P 500's gain of 40%. This supports the widely held view that investing for the long term typically delivers the greatest benefits.
Investors could apply that strategy to semiconductor stock Advanced Micro Devices (AMD +18.37%), which has declined by 65% from its all-time high. Semiconductors continue to grow rapidly in importance, and the sector could be worth as much as $1.5 trillion annually by 2030. AMD is a best-in-class producer, and one that investors should consider buying now.
NASDAQ: AMD
Key Data Points
Semiconductors are down, but certainly not out
Semiconductors are the computer chips that power our everyday digital experiences, from smartphones to cars. The pandemic led to disruptions in their manufacture as fabrication facilities were temporarily closed and supply chains became snarled, resulting in chip shortages throughout 2020 and 2021. At the same time, demand soared as people working and attending school from home realized they needed to upgrade their computers and devices, and the inability to take part in many group leisure activities gave the popularity of video games a boost.
Those trends have largely reversed in 2022, and AMD is far from the only company in its niche that has experienced a steep decline in value. The iShares Semiconductor ETF, which is a barometer for the broader sector, is down 43% year to date. But it's up 112% over the last five years, crushing even the Nasdaq-100 index.
AMD has one of the most diversified product lines in the industry in terms of its end users. It produces chips for gaming consoles, computers, virtual reality headsets, and Tesla's electric vehicles. But the data center segment is the most important one for the company. It has deals with some of the largest providers of cloud computing services in the world, including Amazon Web Services and Microsoft Azure.
Data centers have become more than just places to store information. They're now hives of computing activity where artificial intelligence and machine learning models are trained to make sense of mountains of data that humans could never process manually. Valuable insights can be drawn from those analyses, helping businesses serve customers more efficiently -- and, ultimately, make more money.
AMD might be set for a bumpy end to 2022
On Oct. 6, AMD released preliminary results for the third quarter, saying it booked an estimated $5.6 billion in revenue for the period. That was a big miss from the $6.7 billion the company had previously forecast.
The main drag on its results was the client segment, where sales shrank by 40% year over year due to falling demand for personal computers. But the big winner was the data center segment, where revenue grew by a whopping 45% to $1.6 billion. In the gaming and embedded segments, AMD delivered modest gains, and while the company's overall revenue missed expectations, it was still up 29% compared to the same period last year.
The key for investors here, though, is to focus on the big picture, because AMD is still on track for a 49% jump in annual revenue despite its third-quarter struggles. Plus, there's no denying its long-term trajectory based on the chart below.
AMD's acquisition of Xilinx could be key
AMD recently closed its $49 billion acquisition of Xilinx, which could set up the next five to 10 years of gains for shareholders. Xilinx is a global leader in adaptive computing, creating innovative chips that can repeatedly be optimized in real time -- after they have been installed -- to adapt their capacities to whatever specific application that is needed.
AMD believes this is the next big opportunity in high-performance computing, especially in areas like artificial intelligence, where solid-state chip hardware isn't evolving fast enough to meet demand. The capacity of adaptive chips to be reconfigured many times after they've been manufactured stands in stark contrast to typical chips that need to be fully replaced in order to upgrade.
To put it simply, AMD stock's 65% decline has most likely created a buying opportunity for the long term. This year has been more challenging in some ways for the company than 2020 or 2021, and 2023 may bring its own set of hurdles, but AMD continues to drive its business forward. Five years from now, it's likely that investors will be looking back and realizing that AMD stock was trading at bargain levels in autumn 2022.
