Advanced Micro Devices (AMD 2.37%) stock managed an impressive turnaround from last year's sell-off. In 2022, its share price plunged 55% as macroeconomic headwinds caused reductions in consumer spending across the tech market. In 2023, AMD shares are up 57%, mainly driven by excitement over the company's prospects in artificial intelligence (AI).
Interest in AI has skyrocketed since the launch of OpenAI's ChatGPT last November. As graphics processing units (GPUs) are crucial to developing AI models, chipmakers like AMD have massive potential in the burgeoning industry. Consequently, it's not a bad time to add a chip stock to your portfolio and profit from the growing demand for AI hardware.
AMD is an excellent option. However, before you add this stock to your portfolio, it's a good idea to understand the positives and potential negatives of its business. So, here is one green flag and one red for AMD in 2023.
Green flag: AMD is heavily investing in the $137 billion AI market
The AI market hit $137 billion last year and is projected to expand at a compound annual growth rate of 37% through 2030, according to Grand View Research. The industry's potential for huge growth motivated AMD to pivot its business to AI development, gearing up to challenge market leader Nvidia (NVDA 6.18%) next year.
In June, AMD unveiled what it calls its most powerful GPU ever, the MI300X. The new chip will begin shipping next year and has been designed to compete directly with Nvidia's hardware. Companies across tech are rooting for AMD's AI expansion as increased competition will reduce the cost of chips. The company could enjoy a significant boost to earnings if it can debut its new chip at a competitive price point.
In addition to new hardware, AMD is heavily investing in producing software that can offer AI developers a top-tier experience. Since August, the company has acquired AI software firms Mipsology and Nod.ai. The start-ups' technology will help AMD produce software that works in conjunction with its chips, allowing customers to tune its GPUs to more easily build powerful AI models.
AMD's progress in AI this year could see it make a big splash in the industry in 2024 and profit significantly over the long term.
Red flag: Increasing competition among chipmakers
The AI market attracted countless companies this year, with most prioritizing software development. However, some key tech giants have similar plans to dethrone Nvidia, which could threaten AMD's success.
With years of chip production under its belt, it's not a huge surprise Intel (INTC -9.20%) has moved into AI. The company launched its first desktop GPU in 2022, and it now has a 3% market share. The figure is significantly lower than Nvidia's 87% share and AMD's 10%. However, it suggests Intel could have the infrastructure and know-how to eventually make waves in AI. Intel's performance in the chip market in recent years doesn't instill much confidence for it going head to head with Nvidia and AMD, but it is a threat stockholders should be mindful of.
Another company heading into the AI chip market is Amazon (AMZN 3.43%). CEO Andy Jassy announced in June the retail giant had produced two new AI chips, promising to offer the best price-to-performance ratio available. Amazon lacks experience in the chip development space, but it has years of dominance in the cloud market and recently made promising inroads in AI software. Meanwhile, it has vast resources to potentially become a big player in the space.
Prospective investors should be aware of AMD's competitors as it isn't the only company striving to steal market share from Nvidia. However, AMD is miles ahead of Intel and Amazon. Its years as the second-biggest name in desktop GPUs have given it a considerable head start.
Data by YCharts
Additionally, the chart above shows AMD has the lowest forward price-to-earnings ratio among these four chipmakers, indicating its stock offers the best value. The company has made promising progress toward eventually stealing Nvidia's crown in AI and arguably has the best chance at challenging the semiconductor company over the long term.
As a result, the green flag outweighs the red in this case, with AMD's stock a compelling buy right now.
