Despite soaring demand for artificial intelligence (AI) accelerators and market share gains in the PC and server CPU markets, shares of Advanced Micro Devices (AMD +1.41%) have been slumping over the past year. Since peaking in early 2024, AMD stock has plunged nearly 50%.
Revenue and earnings growth aren't the issue. For 2024, AMD reported a 14% jump in revenue and a 25% rise in adjusted earnings per share. AMD's fourth-quarter results were solid, beating expectations for revenue and including 69% growth and 58% growth in the data center and client segments, respectively. Long story short, things are generally going well for AMD.
The stock market has a different interpretation, sending shares of AMD lower following that fourth-quarter report. While the big picture looks good, there are a few issues that could be hurting the stock.
NASDAQ: AMD
Key Data Points
Disappointing AI growth
AMD generated more than $5 billion in revenue from its AI accelerators in 2024. That's up from essentially nothing in 2023. While that growth is impressive, the company's outlook for 2025 left a lot to be desired. AMD didn't provide specifics, saying instead that it expected "strong double-digit growth."
There are two problems with this outlook. First, Nvidia generated more than $30 billion in data center revenue in its most recent quarter alone. On an annual basis, the market leader is outselling AMD by more than 20-fold. If there were ever an opportunity to steal market share, this is it. And yet, AMD's AI chip revenue might only grow to $7 billion or so this year.
Second, demand for powerful AI accelerators is still booming. Microsoft, Meta Platforms, Alphabet, and Amazon have each announced audacious capital spending plans to boost their AI compute capacity, and that's on top of the Trump administration's Stargate initiative. Against the backdrop of this AI spending spree, AMD's AI accelerator outlook is downright disappointing.
In the long run, AMD does expect its AI business to eventually generate tens of billions of dollars in annual revenue. However, an uncertain timeline has investors up in arms.
Trouble in gaming and embedded
AMD's data center and client computing segments are performing well. However, two smaller segments have been struggling. The gaming segment, which will be combined with the client computing segment starting next quarter, suffered a 58% revenue decline in 2024. The embedded segment, which includes AMD's acquisition of Xilinx, saw revenue tumble 33% last year due to excess customer inventory levels.
For the gaming segment, there's no quick fix. AMD's gaming GPU business has been far behind Nvidia for many years, and new product launches this year are unlikely to dramatically change the story. The semi-custom chip business, which provides chips for the major game consoles, isn't going to rebound until the next generation of consoles launch.
The embedded segment is particularly disappointing, given how much AMD spent to acquire Xilinx. The embedded segment generated $3.6 billion in revenue and $1.4 billion in operating profit last year, compared to a $35 billion price tag for Xilinx. So far, it's looking like AMD may have overpaid.
Is AMD stock a buy or sell?
AMD stock isn't overly expensive based on adjusted earnings, with a price-to-earnings ratio of about 33. However, a few things are important to remember.
First, the data center CPU and PC CPU businesses are almost certain to slow down. The PC market in particular is sluggish, and rival Intel has been getting more aggressive about stabilizing its market share as it looks to turn itself around. AMD stock isn't expensive, but it's not cheap either. A growth slowdown could push the stock lower.
Second, investors shouldn't discount the possibility that AI is a massive bubble and that the "tens of billions of dollars" long-term estimate from AMD for its AI chip business will never materialize. If AMD's AI chip business doesn't accelerate from here, a major component of the company's growth story collapses.
All that being said, AMD will remain highly competitive in its core data center and PC CPU businesses, regardless of what Intel does. The company's products are great, and the era of Intel dominating those markets appears to be over. AMD makes sense as a long-term investment, but in the short run, the stock could face more challenges in 2025.
