It's hard not to be bullish about Advanced Micro Devices (AMD +0.40%). The company's stock has more than doubled in 2023, up some 115% since Jan. 1. Meanwhile, it appears to be making promising headway in the budding artificial intelligence (AI) market.
The company's biggest competitor, Nvidia, has enjoyed soaring earnings this year thanks to a spike in demand for AI chips. Nvidia's performance over the last 12 months could mean big things for AMD in 2024 as AMD plans to launch a powerful new graphics processing unit (GPU). If AMD can replicate even a portion of Nvidia's success in the industry, the company could expect major gains next year.
As a result, now is the perfect time to learn more about this tech giant and determine whether it's worth adding to your portfolio. So, is AMD's stock a buy now? Let's take a look.
AMD likely has a bright future in AI over the long term
Many companies across tech have restructured their businesses to focus on AI in 2023, with several venturing into the hardware side of the industry. Tech firms like Intel, Amazon, and Microsoft all have plans to eventually challenge Nvidia's dominance in AI chips and take a slice of the lucrative market.
However, AMD likely has the best chance to thrive in the arena thanks to its years of being the second-biggest name in GPUs (second only to Nvidia). AMD has the brand recognition and infrastructure in place to catch up to its primary rival far quicker than other competitors.
AMD launched its MI300X AI GPU on Dec. 6. The new chip is reportedly faster than Nvidia's H100 GPU, offering up to 60% increased performance. If it can deliver competitive price-to-performance, AMD could see significant revenue gains over the next year.
NASDAQ: AMD
Key Data Points
Microsoft's Azure has already signed on to become the first cloud platform to use the chip. Meanwhile, Meta, Broadcom, and Cisco have partnered with AMD to build advanced AI systems.
The AI market exploded in 2023 and has shown no signs of slowing. Nvidia may have gotten a head start, but AMD looks likely to make a big splash next year, and you might not want to miss out on its growth potential.
Poor valuation makes other stocks more attractive for now
AMD's stock has skyrocketed this year, but its earnings still have yet to see a return on the chipmaker's heavy investment in AI. The chart below reflects this, with the company's free cash flow plunging nearly 60% year to date while Nvidia's more than tripled.
Data by YCharts
In the third quarter of 2023, AMD's revenue rose 4% year over year, beating Wall Street estimates by $110 million. The growth was mainly owed to a 42% increase in AMD's client segment, which benefited from improvements in the personal computer market.
However, AMD's data center sales crucially fell about 1% as Nvidia cornered the market on chips. For reference, Nvidia's data center segment posted a 206% increase in revenue for the same quarter. The newly released MI300X could trigger a spike in AMD's data center revenue next year. However, until then, its stock might be too expensive to justify.
Data by YCharts
The tables above compare AMD's price-to-earnings ratio and price-to-free cash flow against the same metrics for some of the biggest names in AI right now. AMD has the highest figures on both fronts by a significant margin, meaning its stock offers the least value out of all these companies.
AMD is on a promising growth trajectory and will likely flourish over the long term. However, its high valuation is hard to justify with options like Alphabet and Microsoft as alternative ways to invest in AI. Even Nvidia's high stock price is more attractive, with better valuation metrics and a more established position in the industry.
It's wise to keep AMD on your radar to strike when the time is right, but cheaper options are too good to pass up for now.
