The COVID-19 pandemic triggered a global chip shortage in 2020 as increased demand for tech strained an already burdened industry. Semiconductor chips are crucial components for consumer electronics such as smartphones, computers, and cars, where they are necessary for everything from power steering to entertainment systems. As a result, chip demand has soared in recent years, and the pandemic pushed the market over the edge.
The shortage began easing in the second half of 2022 as high inflation led to decreasing tech sales, which helped shift the supply-and-demand situation closer to balance. However, the shortage of automotive chips continues, and is unlikely to improve until 2024, according to research from J.P. Morgan.
As one of the world's leading semiconductor companies, Advanced Micro Devices (AMD 0.03%) was hit hard first by the shortage and then by the decrease in demand. The company's stock price fell by 55% in 2022. However, AMD continues to have an excellent long-term outlook, and at this point, its stock presents a monster opportunity for investors.
The importance of a long-term perspective
With the worst of the chip shortage seemingly in the past, AMD's stock has risen 27% since Jan. 1. However, it remains down 20% year over year, suggesting it still has plenty of room for growth.
As with any stock investment, AMD's shares are best as a long-term buy, thanks to its crucial role in multiple high-growth markets. For example, in 2022, the company's data center segment reported a 63.6% year-over-year increase in revenue to $6.04 billion, as operating income rose 86% to $1.8 billion. That growth was largely driven by the booming cloud market, which uses data centers to power platforms like Amazon Web Services and Microsoft's Azure.
According to Grand View Research, the cloud market -- which was worth $483.98 billion in 2022 -- will expand at a compound annual rate of 14.1% through 2030. AMD is well-positioned to profit from that growth.
Moreover, in 2022, the company's embedded segment revenues soared by more than 1,700% to $4.6 billion while operating income climbed by 5,000% to $2.3 billion. AMD owed that steep gain primarily to its acquisition that year of Xilinx, a company focused on producing processors for specialized uses in aerospace and defense, space, artificial intelligence, and more.
AMD stumbled over the last few years as it faced unavoidable headwinds. However, it likely has a lucrative long-term future because of its strong position in data centers and embedded products.
AMD's strength is its diversification
AMD is often compared to its chipmaking peer Nvidia (NVDA +1.67%). Both companies are active in the consumer graphic processing unit (GPU) market. However, AMD's stock is the more compelling investment due to its diversification. In addition to GPUs, the company is a leading name in processors and semi-custom products that power consumer devices such as Sony's PlayStation 5, Microsoft's Xbox Series X|S, and multiple virtual reality headsets.
The tech giant's varied business kept it growing in 2022 despite reductions in consumer demand, with its revenue rising 43.6% to $23.6 billion. Its data center and embedded segments were able to compensate for the decline of its client segment, which was hit by the slowdown in the PC market.
NASDAQ: AMD
Key Data Points
Worldwide desktop GPU shipments fell by 42% in 2022. Nvidia's 88% market share in the industry led its revenue to rise 2% year over year in its fiscal 2023, which ended Jan. 29. Meanwhile, AMD's 8% market share spared it from the worst of the market's declines.
AMD has a long future ahead in a variety of industries, with its powerful chips able to run and develop software in cloud computing, artificial intelligence, virtual reality, and more. As the chip shortage shows signs of easing, now is the perfect time to consider investing in this tech titan.
Additionally, AMD's forward price-to-earnings ratio of 27 has declined 9% over the last year as its stock has increased in value. And compared to Nvidia's forward price-to-earnings ratio of 52, AMD's stock is a monster opportunity in the global chip shortage.
