Is It Too Late to Buy AMD Stock?

Advanced Micro Devices (AMD -1.56%) is on a tear. The stock is up 84% this year after a brutal sell-off in the 2022 bear market.

Such a rapid increase might lead some investors to question whether it is too late to benefit from the semiconductor stock's gains. They need not worry too much. As its industry recovers from a cyclical downturn, AMD likely will continue to serve investors well. Here's why.

Why the increase?

Admittedly, AMD as a company has had its share of disappointing news in 2023, including in the most recent earnings release. In the first quarter of 2023 (ended April 1), revenue of just under $5.4 billion dropped 9% compared with the same quarter in 2022. Most of that drop came from a 65% year-over-year revenue decline for its client segment. While the embedded segment rose by over 160%, that growth came primarily from the Xilinx acquisition. That decrease took AMD to an operating loss in the quarter, and it reported $139 million in quarterly net losses, down from a $786 million profit in the year-ago quarter.

Still, the enthusiasm surrounding artificial intelligence (AI) helped keep the stock price climbing significantly despite the earnings report. And that rising stock price means AMD now sells at a price-to-sales (P/S) ratio of 8. While that is far from a record valuation, AMD has undoubtedly become a more expensive stock and some investors might even conclude it is too late to buy.

AMD's growing role in its industry

What the doubting investors might not be aware of is that AMD positioned itself to capitalize on the AI opportunity by introducing its generative AI chip called the MI300X in June. It dubbed this chip the most "advanced accelerator" for generative AI and announced that the company would power Microsoft's Azure virtual machines.

Admittedly, rival Nvidia remains the leading company in this space and holds a dominant market share, according to Citigroup's research. Still, investors should not count AMD out as the two companies are longtime rivals in the GPU space.

And they should not forget AMD's other attributes. For one, it has made strides against Intel's one-time dominance of the data center market. Also, in gaming, its chips power the latest versions of Microsoft's Xbox and Sony's PlayStation.

Revenue growth was flat for data centers in the most recent quarter. And gaming revenue fell 6% year over year during that period. But investors should remember that the chip business works in cycles, and most parts of the semiconductor industry have contended with a down cycle.

More importantly, the industry recovered from every past down cycle, and when conditions improve, it should bode well for AMD.

Consider buying AMD stock

Despite the recent increases in the stock price, investors can still drive returns from owning AMD. Indeed, the recent hike likely already incorporated much of the expected near-term growth into the stock price.

Nonetheless, the MI300X chip and AMD's alliance with Microsoft should give AMD a prominent role in AI. Moreover, the chipmaker's other segments tend to act in a cyclical manner. As client revenue recovers and as gaming and data center spending enter an upcycle, it will probably take AMD stock higher as investors buy more shares.

Cyclical behavior also points to an eventual upcycle. As the world moves on from the pandemic lockdowns, AI-driven growth and the recovery of other chip-related segments could take AMD higher as more investors take an interest.