The arrival of artificial intelligence (AI) into the mainstream has supercharged shares of semiconductor giant Advanced Micro Devices (AMD 0.67%). Last December, the stock was at a 52-week low of $116.37, but in 2024, it topped $227.30.
Since reaching that record high in March, AMD's share price has pulled back, and the stock was down about 6% in 2024 through Nov. 18.
Given that price decline, does this mean the fervor over AI is done? Or is the stock's drop a signal that now is the time to buy? Let's examine the company in detail to help you decide.
NASDAQ: AMD
Key Data Points
AMD's success with AI
AMD was once known primarily as a purveyor of semiconductors for the video game industry. Now, the chipmaker is transforming into an AI juggernaut under the leadership of CEO Lisa Su.
Su's 10th anniversary as CEO is this year, and she sees great potential for the company: "Looking out over the next several years, we see significant growth opportunities across our data center, client, and embedded businesses driven by the nearly insatiable demand for more compute."
AMD's performance supports her point. Customers operating data centers, which house cloud computing servers for AI, began adopting the company's chips over the past year, and its sales to this market have exploded.
In its fiscal third quarter, ended Sept. 28, data center segment revenue rose 122% year over year to a record $3.5 billion. This division accounted for over half the company's total third-quarter sales of $6.8 billion, helping AMD achieve 18% year-over-year growth.
The company's data center customers include tech luminaries such as Microsoft, Meta Platforms, and Uber. Just Meta itself purchased 1.5 million units of AMD's EPYC computer processor for its cloud servers.
Rising demand for AMD's AI solutions
The company's third-quarter data center success is a substantial change from 2023, when sales represented $1.6 billion of its $5.8 billion in total third-quarter revenue. The ability to quickly seize the sudden surge in demand for AI-related semiconductor products illustrates that its evolution into an AI powerhouse is working.
The customer demand for chips to power AI not only remains high, but year-over-year sales growth is also accelerating, which indicates the company is successfully capturing an increasing share of this AI demand.
| Quarter | Data Center Revenue | YOY Change |
|---|---|---|
| Q3 2024 | $3.5 billion | 122% |
| Q2 2024 | $2.8 billion | 115% |
| Q1 2024 | $2.3 billion | 80% |
| Q4 2023 | $2.3 billion | 38% |
Data source: AMD. YOY = year over year.
AI chip demand isn't coming just from data centers. The client segment, which represents products sold to the personal device market (including semiconductors for laptops), is also seeing strong sales growth.
In the third quarter, the client segment's revenue reached $1.9 billion, a 30% year-over-year increase. Together, the data center and client divisions accounted for 80% of third-quarter revenue.
Management expects this AI demand will drive even greater growth in its fiscal fourth quarter, estimating quarterly revenue to reach about $7.5 billion, an impressive 22% year-over-year increase from $6.2 billion.
AMD's AI transformation
As CEO Lisa Su indicated, this AI demand is expected to last years, which is why her company is doubling down on its acquisitions. It bought Silo AI in August to help customers integrate AMD hardware into their AI tech, and plans to acquire ZT Systems, an expert at implementing AI-related infrastructure.
Thanks to its strong top-line performance, the bottom line is growing as well. Third-quarter net income was up 158% year over year to $771 million. This raised diluted earnings per share (EPS) to $0.47, a 161% jump from the prior year.
With AI demand showing no sign of slowing down, and considering AMD's growing strength in capturing its share of this market, the company is a great long-term investment. The question is whether now is the time to buy.
One factor to consider is the company's forward price-to-earnings ratio (P/E ratio), which is a way to assess the relative value of a stock by telling you how much investors are willing to pay for every dollar of earnings.
AMD stock is trading around 42 times forward earnings at the time of this writing. That's a decline from the valuations it was commanding earlier in the year -- valuations that were so elevated, they were higher than the forward P/E for AI darling Nvidia.
Data by YCharts.
AMD stock fell recently after management announced job cuts in areas it is de-emphasizing to shift resources toward its AI-related businesses. With its price drop, the forward P/E is now below Nvidia's. You could wait for shares to drop further, but the stock's current valuation is more reasonable now, and that means it's a good time to consider buying shares in AMD.
