A boom in the artificial intelligence (AI) market this year made Advanced Micro Devices (AMD 1.31%) a favorite on Wall Street. Its shares are up around 50% since Jan. 1, gaining support from its expansion into the sector. The company is making moves to challenge market leader Nvidia next year, hoping to cash in on the soaring demand for AI chips.
However, AMD hasn't had it easy in 2023. Quarterly results revealed repeated revenue declines as it contends with a burdened PC market and reductions in commercial and consumer spending. So before you fill up on AMD stock, it's a smart move to learn about the positives and potential negatives of its business.
So, here is one green flag and one red flag for AMD in 2023.
Green flag: AMD is gearing up to take on Nvidia next year
Nvidia's meteoric rise in AI this year saw it snap up about 90% of the chip market. Its years of dominance in graphics processing units (GPUs) allowed it to become the go-to for AI-minded companies seeking the hardware necessary to develop AI models. However, Nvidia's success also highlighted how far behind other chipmakers had fallen in AI, including AMD.
As a result, AMD spent this year playing catch up by heavily investing in the category. In June, the tech giant unveiled its most powerful GPU to date, the MI300X, which is expected to begin shipping in 2024.
The new chip comes at a time when many companies are calling for increased competition. Nvidia's command of the market has allowed it to charge high prices for its GPUs. So, if AMD's new chip can offer better price-to-performance than Nvidia's, it could pose a genuine threat to the semiconductor company.
Moreover, AMD wants to take on Nvidia in more than just chips. The company acquired AI software company Mipsology last month. The start-up's technology should help AMD develop a platform that runs in conjunction with its GPUs to create AI models, similar to Nvidia's CUDA Toolkit. AMD is making moves to offer an equal experience to Nvidia, giving it solid prospects in the industry.
The AI market hit $137 billion in 2022 and is projected to expand at a compound annual growth rate (CAGR) of 37% through 2030. AMD's expansion in the industry could allow it to profit significantly from that growth over the long term.
Red flag: Hits to revenue
AMD posted its second quarter of 2023 earnings on Aug. 1, reporting an 18% year-over-year decline in revenue. The company proved particularly vulnerable to a PC market downturn where global shipments fell 13% in Q2 2023, according to International Data Corporation (IDC). AMD's client segment, which includes income from computer-component sales to consumers, saw revenue plunge 54% in the quarter as operating losses hit $69 million.
In addition to PC market challenges, trouble in AMD's data-center segment suggests it has actually been hurt by the boom in AI. The company spent years as a leader in central processing units (CPUs) and profited from their use in the cloud market. However, advances in AI have made GPUs far more crucial to cloud companies, with AMD's data-center revenue tumbling 11% in Q2.
AMD's earnings slips, alongside a stock rally, have made its shares an expensive option right now. The company's price-to-earnings (P/E) ratio sits at 51. For reference, an undervalued stock's P/E would usually be around 20 or below.
Data by YCharts.
While AMD's P/E is far lower than Nvidia's, as seen in the chart above, there are cheaper options with which to invest in AI. Microsoft, Alphabet, and Apple are each heavily investing in the technology and could profit immensely from the industry over the long term.
AMD has a solid outlook in AI over the next five to 10 years. However, its high stock price makes it a risk while stockholders wait for it to see returns on its AI expansion. As a result, it might be worth investing in a different AI stock for now as you wait for its shares to come down to a more attractive price point.
