One of the dominant themes surrounding technology companies this year is artificial intelligence (AI). Microsoft kicked things off after its multibillion-dollar investment in OpenAI, the developer behind ChatGPT. Unsurprisingly, other Big Tech companies, such as Amazon and Alphabet, followed suit, with each investing in a rival generative AI opportunity called Anthropic.

While these strategic investments were enough to spark some excitement among Wall Street and retail investors alike, I think the party really got started when semiconductor leader Nvidia released earnings back in May for its first quarter of fiscal 2024 ended April 30. After showcasing its dominant performance in data center services and advancements in graphics processor units (GPUs) , the stock has rocketed about 60%.

But over that same time frame, Nvidia's top rival, Advanced Micro Devices (AMD 2.26%), has only managed to move up about 8%. The lack of movement in the stock is almost startling, considering how much enthusiasm there is for chip stocks and AI exposure. In a way, it's as if the investment community at large has ditched AMD and poured everything into Nvidia.

After AMD reported third-quarter earnings, I think the company demonstrated yet again how strong its operation is and why a long-term investment is compelling. Let's break down the earnings report and analyze the moves the company is making to take on Nvidia. Moreover, a closer look at management's long-term outlook relative to the stock's current valuation should help supplement the thesis around why now looks like a terrific opportunity to buy some shares in AMD.

Another solid performance

For the quarter ended Sept. 30, AMD reported total revenue of $5.8 billion, which represented a 4% increase year over year. The biggest contributor to revenue was AMD's data-center business, which generated $1.6 billion in sales. Although this was little changed year over year, there are some under-the-radar reasons to believe that this segment could witness surging growth sooner rather than later.

About a month ago, I wrote a piece on AMD's acquisition of a machine learning start-up called Nod.ai. As I mentioned, AMD has a successful track record with mergers and acquisitions, and I viewed the Nod.ai deal as yet another savvy move by management. What made Nod.ai so compelling is that the company's technology aligns well with AMD's open-source vision as it relates to its AI roadmap. In AMD's Q3 investor presentation, I learned that the company also closed on another acquisition of a start-up called Mipsology.

Both Nod.ai and Mipsology are now key components of AMD's data-center operation. Although the current growth trajectory may look mundane, I think AMD's ability to promptly identify technologies that can integrate with its own core services should not be overlooked. Moreover, AMD has yet to benefit in a meaningful way from either of these deals. I think that Nod.ai and Mipsology represent a unique opportunity to inject some new life into AMD's data-center business, and investors should be anything but discouraged about its current performance.

Another important area to focus on is AMD's client segment. For the quarter ended in September, AMD reported $1.5 billion in client revenue, up a whopping 42% year over year. To me, this was the most encouraging part of the call as management assured investors that the return to growth was driven in large part by normalization in the PC market. For the last several quarters, management has attributed its poor performance in the client segment to waning demand for PCs. With the effects that inflation and high interest rates have on consumer discretionary spending, this dynamic isn't entirely unreasonable. Nonetheless, given the lingering nature of these macroeconomic factors on AMD's business, it's not surprising that some investors likely lost patience and moved on from the stock.

With a return to growth in the client segment coupled with some exciting opportunities in the data-center unit via acquisitions, investors may want to know what management has to say about the future.

An image of AMD's Q3 financial performance showing revenue by segment as well as other metrics including free cash flow.

Image source: AMD Investor Relations website.

Remember to think long-term

During the earnings call, management provided investors with its outlook for Q4 as well as a preview of next year. For Q4, management called for "strong double-digit percentage" growth in both data-center and client segment revenue. While this is nice to see, it was the commentary around next year that raised my eyebrows.

Within the data-center business, management called for $400 million in revenue from data-center GPUs in Q4. However, investors learned that AMD believes revenue from data center GPUs could reach more than $2 billion in 2024. The catalyst fueling this growth is, of course, the "rapid progress we are making with our AI road map execution," according to management.

To say that AMD is bullish on its AI roadmap would be an understatement. AMD is laying the foundation for long-term growth built around AI. However, the majority of headlines and investor discussions seem to revolve around Big Tech, including Nvidia. To me, AMD represents a overlooked AI opportunity and is not getting enough credit for the moves it's been making.

Semiconductor chip manufacturing.

Image source: Getty Images.

Should you invest in AMD?

There are many ways to value a stock. As my thesis around AMD revolves around the long-term picture, I am going to look at the stock on a forward price-to-earnings (P/E) multiple. Forward P/E can be useful because it accounts for estimated future growth. As of the time of this article, AMD stock trades at a forward P/E of roughly 31, much higher than the forward P/E of about 20 for the S&P 500.

While this may imply that AMD stock is overvalued, I don't see it this way. AMD is a growth stock, and it very much trades like one. Given the cyclical nature of the semiconductor industry coupled with sentiment around AI, it's not unreasonable for AMD stock to experience such dramatic moves any given day.

To me, there is more than enough evidence that AMD has strong growth prospects. I would not wait until the acquisitions begin to materially help the business to make an investment decision. Management did enough on the call to assure me that the moves it's making are the right ones to continue gaining momentum and market share against Nvidia. Although the stock may not look cheap, I think the growth prospects of AMD are stronger than the broader market, and therefore, the premium seems warranted. I think now is a fantastic opportunity to dollar-cost average into a surefire leader at the intersection of AI and semiconductors.