Chip designer Advanced Micro Devices (AMD 1.14%) is on a roll. The stock is up by 68% year to date, having nearly doubled from last October's multiyear lows.

The company has become a credible rival to sector giant Intel (INTC -0.62%) in processors for desktops, notebooks, and even server systems of late. At the same time, AMD is nipping at the heels of graphics processing unit (GPU) leader Nvidia (NVDA -1.99%) at a time when GPUs hold the key to the booming artificial intelligence (AI) kingdom.

But many investors worry that the time to buy AMD may have passed. If the stock has doubled in a year and trades at a lofty 95 times free cash flows, where is the room for future gains?

Well, let's see if I can find that wiggle room for you.

Bearish thoughts: AMD's recent performance

AMD investors must accept a few unpleasant facts before hitting the "buy" button.

  • The market has priced plenty of AI opportunities into AMD's stock already. The share price rose by 68% from the New Year to August 16, and that's not even the whole story. Measuring from the three-year low point of last October, you're looking at a 97% gain.
  • Yet the rocket is running out of fuel. AMD's share price is down by 8% in the past month.
  • At the same time, the business isn't exactly booming. AMD is actually experiencing a significant downturn in terms of financial success. Sales and cash flows are down in recent quarters, and adjusted earnings have turned negative:

AMD Revenue (TTM) Chart

AMD Revenue (TTM) data by YCharts

  • So the company isn't profitable and doesn't show skyrocketing sales growth. However, the stock is priced for perfection at 8.1 times trailing sales and 95 times free cash flow. That's way up there in Wall Street's nosebleed seats.

Bullish thoughts: Former glory and future prospects

Of course, AMD's stock didn't fly up to this lofty perch on a mere market whim. People are excited about this investment for several good reasons.

  • The AI surge is just getting started. Current and future providers of AI-based products and services are merely drawing up their long-term battle plans right now. The hardware investments will come later, unlocking lots of AI orders for AMD and Nvidia.
  • The global economy has been tucked in bed since November 2021, sipping fiscal chicken soup to get over the inflation flu. At the same time, the semiconductor market suffered a lengthy shortage of manufacturing capacity. As a result, AMD's largest customers tightened their budget belts and scaled back their data center upgrades. Those delayed projects should soon be back on the front burner. Taken together with the expected surge of brand-new AI orders, AMD's resulting growth opportunity could be truly epic for a couple of years.
  • Once upon a time, AMD was the easily forgotten little challenger to Intel's and Nvidia's dominant market shares. Now, AMD regularly supplies more than 30% of all chips in the general-purpose x86 family. That includes a 25% share in the market for server chips -- an unthinkable idea just a couple of years ago. This little microchip upstart is growing up fast, even during a sectorwide downturn.
  • The stock chart's rebound from last year's trough sure is impressive, but AMD shares are still trading 33% below the all-time highs of November 2021. You know, just before the inflation crisis started. That was before AMD closed the game-changing Xilinx acquisition, and before OpenAI's ChatGPT kick-started the AI frenzy. If AMD was worth $161 per share back then, assuming further gains with support from those new tailwinds seems reasonable.

Is AMD the stock for you? It depends!

AMD's high-flying stock comes with elevated risks, as any misstep on the road to long-term gains could set off a sharp price correction. That's especially true if the misadventure comes before the pent-up semiconductor demand is released. Unprofitable businesses and stalled growth stories are often quite volatile.

However, the company rarely makes big mistakes under the excellent leadership of CEO Lisa Su. With the AI opportunity and merely delayed data center expansions coming up ahead, AMD looks ready to climb some fresh peaks. And the stock may be pricey on its own terms, but AMD's shares are downright cheap next to Nvidia's 43 times price to sales and 221 times free cash flow.

So AMD's stock sure isn't every investor's cup of chicken soup, but it could be tasty if you don't mind an elevated risk profile. And it is absolutely a lower-priced alternative to Nvidia if you're looking for a hardware-based play in the AI business.