2023 has been a fun year for companies in the realm of artificial intelligence (AI). As a leading maker of current and future AI-engine microchips, Advanced Micro Devices (AMD 2.37%) has seen its fair share of market interest.
The stock has gained 59% year-to-date. Even so, AMD's valuation sits at a modest 7.6 times trailing sales and 25 times forward earnings projections.
Is the chip designer running out of steam or does it still make sense to buy AMD stock today?
Let's find out.
AMD's blooming AI ambitions
It's easy to categorize AMD as an AI stock. The company's Instinct series was explicitly designed to handle the intense computing of training machine learning systems. Its EPYC line of server-class central processor units (CPUs) is commonly found in the world's largest supercomputers -- which often are tasked with AI training. Enthusiasts will find that AMD's Radeon GPUs can deliver respectable hobbyist-level AI results. And don't forget that the company is acquiring small AI software companies. AMD clearly takes the AI opportunity seriously.
But that's far from the whole story. AI orders are more of a future prospect than a current business driver. The Instinct MI300 AI accelerators are entering the market as we speak, alongside production ramp-ups of next-generation CPU and GPU products.
The generation shifts could hardly be better timed, as the global economy balances on the edge of a large-scale recovery. AMD's new products should see strong market traction as consumers and AI-hungry businesses spend money with more confidence.
So AMD has a few things in its favor. It serves a diverse market, from big-iron servers and AI computing systems to laptops and video game consoles. The company plays an active part in the AI boom and hopes to take market share from arch-rival Nvidia (NVDA 6.18%) in that space. Yet, AMD's stock price has fallen 29% lower in two years while Nvidia gained 47%.
What's going on with that sharply tilted imbalance?
A tale of two AI strategies
Nvidia is leaning into this AI frenzy with gusto, and the effort is already showing results on its financial statements. In the recently reported second quarter of fiscal year 2024, Nvidia's data center sales rose 141% year-over-year. And that's just the start of a long-term trend, as Nvidia will ramp up the manufacturing of AI chips for at least a couple of years.
AMD is entering the AI market more cautiously. Yes, the company is signing deals and partnerships all over the place and expects AI products to make a meaningful contribution to the top and bottom lines in due time, but its data center sales actually fell 11% in the second quarter. CEO Lisa Su expects AI to become "a multibillion-dollar growth opportunity" in the long run, but the surge hasn't started yet.
The disparate market moves make sense in this light. Nvidia's AI engines are already running but AMD's are tuning up for a long race -- on the financial sidelines.
Image source: Getty Images.
AMD: A robust AI buy for long-term investors
Now you know why Nvidia's stock has skyrocketed while AMD delivered milder gains -- or an actual price drop when you include the 2022 downturn. But what does that mean for AMD investors?
Frankly, I think we're looking at a fantastic buy-in opportunity here. AMD's AI solutions are comparable to Nvidia's, and a slight difference in the time spans of these growth stories shouldn't do much to their long-term results. Yes, AMD has some catching up to do, but that's more in the arena of public perception than in the field of producing competitive hardware. Many high-performance system builders already prefer AMD's AI accelerators. I'd like to see some benchmark tests before calling the next generation in anybody's favor.
It may feel strange to buy AMD stock in a period with negative earnings and minuscule cash flows, especially since Nvidia is flexing its financial muscles at the same time. But where the two stocks have comparable metrics, AMD consistently looks far more affordable these days. AMD's stock trades at 7.7 times trailing sales and 3 times the company's book value. The same valuation ratios for Nvidia stand at 39 and 33, respectively.
So if you're looking for a long-term play on the nascent AI market, AMD could be a strong choice at these fairly modest prices. I would certainly start an AMD position before adding more cash to my existing Nvidia holdings.
