Advanced Micro Devices (AMD -1.25%) stock has delivered stunning gains of 84% so far in 2023, which may seem surprising given that the company's revenue and earnings are expected to shrink this year.

Analysts are anticipating a 3% drop in AMD's revenue in 2023 to $23 billion. Its earnings are forecasted to drop to $2.86 per share from $3.50 per share in 2022. However, the broader recovery in semiconductor stocks this year and the artificial intelligence (AI) hype have lifted AMD stock despite the uninspiring outlook. But this also means that AMD stock is richly valued right now, trading at a whopping 489 times trailing earnings.

The rich earnings multiple and the headwinds that AMD faces suggest that it may be too late for investors to buy into this semiconductor stock's growth spurt.

AMD stock seems to have gotten ahead of itself

According to a consensus of 37 analysts covering AMD, the stock has a median price target of $100 for the next 12 months. That points toward roughly a 20% drop in the company's stock price from current levels. The Street-high price target of $200, on the other hand, indicates that AMD stock could rise 61% over the next year.

But for that to happen, the chipmaker will need to deliver a big turnaround and justify the expensive multiple it is trading at. AMD's revenue was down 9% year over year in the first quarter of 2023 to $5.4 billion. Adjusted earnings fell a whopping 47% to $0.60 per share during the quarter. The guidance points toward worse times ahead -- AMD anticipates $5.3 billion in revenue in the current quarter, which would be a 19% drop from the prior-year period's top line.

We have already seen that AMD's revenue and earnings are expected to decline for the full year as well. So, it can be easily said that AMD's rally doesn't seem justified. A poor set of results and a gloomy outlook would be enough to send the stock packing, especially considering that the personal computer (PC) market is expected to remain under duress this year.

PC shipments crashed 29% year over year in the first quarter of 2023, according to market intelligence firm IDC. A recovery is expected to happen only toward the end of the year, but even that's contingent on the macroeconomic scenario. Given that AMD gets a significant chunk of its revenue from selling central processing units (CPUs) and graphics processing units (GPUs) used in PCs, the company may find it difficult to accelerate its growth.

Additionally, AMD's data center business has slowed down substantially. The segment's revenue was flat year over year in the first quarter of 2023 at $1.3 billion, accounting for 24% of its top line. On the other hand, AMD's rival Nvidia (NVDA -0.84%) reported a 14% year-over-year increase in data center revenue in the previous quarter to $4.28 billion.

Nvidia attributed its robust data center growth to the healthy demand for its graphics cards, which are playing a key role in the proliferation of AI. The chipmaker has also set its sights on the server processor market, which has been critical to AMD's growth in recent years. Nvidia's Grace server CPUs have now moved into production and they are gaining traction among customers, with giants like Japanese investment company SoftBank opting to deploy them in data centers handling generative AI workloads.

The robust demand for Nvidia's CPUs and GPUs was a key reason the company recently delivered a solid outlook. The chipmaker is now expected to deliver solid growth this fiscal year, and some of that could come at AMD's expense as Nvidia's server processors are likely to be stiff competition.

What should investors do?

Buying AMD stock following its tremendous rally doesn't look like a good idea. The expensive valuation, the headwinds in the PC market, and competition from Nvidia could weigh on AMD and derail its rally. That's why it would be prudent for investors to wait for a significant pullback in AMD's stock price along with a turnaround in the company's fortunes.

Of course, the company has a few solid long-term growth drivers that could help it regain its mojo, but it remains to be seen how it overcomes the challenges that it is facing and if its catalysts are strong enough to turn its fortunes around.