Advanced Micro Devices (AMD -10.21%) has witnessed a terrific turnaround on the stock market in 2023 amid the broader rally in tech stocks, with shares of the chipmaker gaining 35% so far, bringing relief to investors after a terrible 2022 when the stock plunged a massive 57%.

The company's stronger-than-expected fourth-quarter 2022 earnings report released on Jan. 31 led to the rally in AMD stock. AMD's impressive growth in the data center and embedded segments and CEO Lisa Su's comment on the earnings conference call that the personal computer (PC) market could hit bottom in the first quarter of 2023 seem to have boosted investor confidence in the company's prospects.

Does this mean investors who missed AMD's rally should buy the stock right now in anticipation of more gains? Or should they tread cautiously and avoid the stock given its valuation and a challenging PC market? Let's find out.

Why AMD stock seems worth buying

AMD's data center and embedded business segments grew big time in 2022 thanks to the company's share gains in the server market and the acquisition of Xilinx, which was completed just over a year ago. These two business segments produced a combined $10.6 billion in revenue for AMD last year, which was nearly 45% of its top line.

AMD's data center revenue increased 63% in 2022 to just over $6 billion. Counterpoint Research estimates that the chipmaker exited 2022 with almost 20% of the server CPU (central processing unit) market under its control, up from 11.7% at the end of 2021. The research firm adds that the growing adoption of AMD's EPYC server processors was the driving force behind the healthy jump in its data center revenue.

Su pointed out on the earnings call that "sales to North American hyperscalers more than doubled year over year," while there was a 38% jump in the number of AMD-powered supercomputers in the list of top 500 supercomputers. AMD management expects further market share gains in the data center space this year, leading to an improvement in the company's revenue from this segment.

AMD could also grab a bigger share of server processors. AMD's OEM (original equipment manufacturer) partners such as Dell, Hewlett Packard Enterprise, Lenovo, and others are developing over 140 platforms powered by its fourth-generation EPYC processors, which were released in November 2022. That's a 40% increase over the third-generation EPYC server processors.

Not surprisingly, Wall Street is agreeing with AMD's expectation of more gains in the server market this year. KeyBanc Capital Markets, for instance, is expecting AMD's server share to hit 30% by the end of 2023.

Meanwhile, the embedded business also seems on track to grow impressively in 2023 since it serves multiple end markets such as automotive, communications, healthcare, industrial, and aerospace and defense. AMD recorded $4.55 billion in revenue in the embedded segment last year, and it sees a $29 billion total addressable market (TAM) in this business according to its own internal estimates.

AMD management says that the company is "well positioned to grow revenue and gain share in 2023 based on the strength of our competitive positioning and leadership high-performance and adaptive product portfolio" in the embedded business this year. All this indicates that the embedded business, along with data centers, could be solid catalysts for AMD in 2023 and beyond.

A weak PC market could weigh on AMD

About the PC market, Su remarked on the earnings call that:

First quarter, we said would be roughly seasonal for PCs. I think second quarter -- first quarter should be the bottom for us in PCs. We -- and then grow from there into the second quarter and then into the second half.

However, the latest estimates from market research firm IDC suggest that Su may have been optimistic in her forecast of a PC market recovery. The firm anticipates a 10.7% decline in PC sales this year to 260.8 million units. It was forecasting a smaller decline of 5.6% to 281 million units in December last year. IDC points out that surplus PC inventories along with weak demand will likely weigh on this space once again in 2023.

The market is expected to return to growth from 2024 with a 3.6% increase in shipments. By 2027, IDC sees annual PC shipments hitting roughly 293 million units. But the near-term weakness in this space could hurt AMD stock, as it gets a nice chunk of revenue from selling PC CPUs.

The company sold $6.2 billion worth of PC processors in 2022, accounting for 26% of its top line. The segment's revenue was down nearly 10% over the prior year thanks to the 16.5% drop in PC shipments last year. AMD witnessed weakness in the PC graphics card market as well last year.

This headwind explains why analysts expect AMD's revenue to remain flat in 2023 at $23.6 billion, while earnings could drop 13% to $3.05 per share. A recovery is expected only in 2024.

AMD EPS Estimates for Next Fiscal Year Chart

AMD EPS Estimates for Next Fiscal Year data by YCharts

How to approach AMD stock today

Given that AMD is trading at a whopping 98 times trailing earnings, investors who are looking to buy this semiconductor stock may want to wait for a turnaround in the PC business as that would help justify the expensive valuation.

Of course, the data center business is doing well, but AMD gets substantial revenue from selling PC chips. That's why the weak demand from that segment could puncture the stock's rally and send it lower. Savvy investors, however, can use any dips in AMD stock to go long given its solid long-term prospects.