Since reaching $227 per share in early March, the stock price of Advanced Micro Devices (AMD 1.78%) has pulled back, falling nearly 15%. AMD has attracted increased attention because of its potential as an AI stock, and its valuation has risen to elevated levels. After the market correction, that valuation is lower now, and investors who missed the previous bull market might see this as a chance to add shares, while others might still consider the stock too expensive.
The question for investors is whether that lower valuation makes AMD a buy now or whether they should continue to stay on the sidelines. Let's see if an answer can be found.
The state of AMD
Even with the recent pullback, the stock price is up roughly 85% over the last 12 months. Much of that gain likely came from an elevated interest in its line of AI chips, the Instinct MI300 Series Accelerators. Even though Nvidia (NASDAQ: NVDA) claims at least 80% of this market, the market researcher MarketDigits forecasts the AI chip market will have a compound annual growth rate of 38% through at least 2030. This allows the company to prosper despite claiming only a modest share of this market.
Indeed, the financials reflect this partial comeback. Revenue in the fourth quarter of 2023 grew 10% yearly to $6.2 billion. The data center segment, which includes AI chips and made up $2.3 billion of its revenue, rose 38% year over year.
Moreover, investors should not forget AMD's other segments. Its fastest growth came from the client side as its $1.5 billion fourth-quarter revenue grew 62% year over year. With those increases, declines in the gaming and embedded segments did not derail AMD's fourth-quarter recovery.
The company declined to offer full-year guidance in 2024. Still, analysts forecast 23% revenue growth this year and a 26% increase in 2025. Such increases should take net income much higher, which should be bullish for the stock price over time.
AMD's continuing struggles
However, not all of the numbers have worked in AMD's favor. Full-year 2023 results reflect the recent cyclical downturn across the industry. Revenue of $23 billion dropped 4% compared to last year's levels. During this time, AMD's data center and embedded segments were the only parts of the company reporting growth.
That decline dramatically reduced its operating income, and net income of $4.3 million led to a 22% drop in adjusted net income.
Also, a closer look at its earnings multiple might not necessarily bode well for investors. Its price-to-earnings (P/E) ratio of around 350 probably says more about the drop in profits than a reflection of its valuation, though its forward P/E ratio of 48 makes the stock seem expensive.
Such a valuation does not compare well to Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM), which have also developed AI-ready chips. Moreover, its forward P/E ratio is well above that of market leader Nvidia. Considering that disparity, there could be pressure that reduces gains over time, or perhaps even reverses them.
AMD PE ratio (forward) data by YCharts.
Should investors buy the correction?
Considering the growth of the AI chip market alone, AMD looks like a buy. As it helps meet the demand for these chips, it should increase revenue and income significantly over time. The fourth-quarter increase indicates this trend has already started.
The stock has become expensive, even compared to Nvidia and other emerging competitors in the AI space. Still, with the massive growth expected in the AI chip market, a rising tide should lift all boats. Between that market and AMD's other businesses, the pullback in its stock is more likely a buying opportunity than a signal to stay away from the semiconductor stock.
