Given the rise in Advanced Micro Devices (AMD) in recent months, one could forgive investors for not knowing what to make of that move. Year to date, the stock has increased 70% following a massive sell-off in the 2022 bear market.
Indeed, the run-up has contributed to an elevated price-to-earnings (P/E) ratio, which makes it appear outrageously expensive. Nonetheless, AMD's growing prowess in artificial intelligence (AI) and a crucial alliance could make it a great buy, even at today's prices.
The state of AMD's AI
AMD has likely risen on the coattails of one of its most important rivals, Nvidia. Amid the increased focus on AI, that company's stock has surged to a nearly $1 trillion valuation as investors recognize the importance of chip stocks in the AI market.
At a $173 billion market cap, AMD lags in stock performance and market share. According to Jon Peddie Research, Nvidia has risen by more than 180% since the beginning of 2023 and commands over 80% of the GPU market.
However, this leaves room for a second-place finisher to still perform well. To this end, AMD has taken aim at Nvidia's market share, offering an alternative to Nvidia's Grace Hopper Superchip. In mid-June, AMD released the MI300x chip, calling it the "world's most advanced accelerator for generative AI."
And a partnership could help MI300x gain market share. Last November, AMD, and Microsoft's Azure introduced AMD-powered Azure virtual machines. The Azure collaboration gives AMD a crucial platform to show the capability of its machines.
Since that time, Bloomberg has reported that the companies have formed a partnership to develop AI processors, though Microsoft denies this hardware collaboration. Still, the existing partnership makes it plausible that both companies are working together on AI at some level.
Furthermore, even with the recent slump, AMD has made significant gains on Intel in data centers. Since data centers play a vital role in the cloud, this will probably make its chips more essential on the AI front.
How this could continue to help the stock
So far, the effects of the Microsoft deal and the MI300x chip release have not yet helped AMD's financials. And amid a slump in the chip market, revenue in the first quarter came in at less than $5.4 billion, a 9% decrease year over year. This is also a dramatic reversal from 2022, when revenue grew by 44% yearly.
Due to that decline and increased operating expenses, AMD lost $139 million in the first quarter, down from a net income of $786 million in the year-ago quarter.
Still, investors were likely correct to see the first quarter's financials as a backward-looking metric. Azure represents 23% of the global cloud-computing platform market, second only to Amazon Web Services. Since AI applications depend heavily on the cloud, investors can probably expect this collaboration to become a more significant revenue driver for AMD.
Image source: Synergy Research Group via Statista.
Moreover, AMD is likely not as expensive as it appears. With falling profits, its trailing P/E now approaches 500. However, when looking at its forward P/E, AMD sells for 37 times earnings, and AI-driven bullishness could still take the stock higher in the near term.
Consider AMD
Despite a slump in the chip market and declining revenue, AMD is probably in the midst of an AI-driven comeback. Thanks to the release of a new AI chip and a collaboration with Microsoft, it could mount a significant challenge to Nvidia's dominance. Also, its continued progress versus Intel bodes well on the data-center side of the business.
Admittedly, a forward P/E of 37 is not cheap. But if AMD can return to revenue growth resembling what it saw in 2022, investors might wish they had bought at current levels.
