Advanced Micro Devices(AMD -0.97%) is one of the biggest names in the computing industry but has played second-fiddle to many competitors throughout its lifetime. While it was behind Intel in PC processors for many years, it's now considered a neck-and-neck competitor.
However, a bigger computing trend is going on right now that's far more important than the consumer PC market: artificial intelligence (AI) computing. AMD is currently getting smoked by larger rival Nvidia, but can it mount a comeback to emerge as a top AI stock pick?
AMD's Q4 results were a mixed bag
AMD isn't a focused computing hardware business. It splits its revenue into four sectors: data center, client, gaming, and embedded. Each has a particular use case, but the performance from each couldn't be more different.
Gaming is exactly what it sounds like, as AMD provides gaming GPUs for PCs and gaming systems like the Xbox Series X and PlayStation 5. This division is seriously struggling, with revenue falling 59% year over year to just $563 million in Q4. Embedded processors, a business AMD acquired by purchasing Xilinx, also struggled, with revenue falling 13% to $923 million. This division makes processors for specific application purposes and is optimized for lower power consumption.
These divisions are dragging AMD's total growth rate down and aren't reasons to be excited about the company. However, the other two are. Client revenue, which accounts for all of the original equipment manufacturer (OEM) processors and equipment it places in PCs, was up 58% year over year to $2.3 billion. This was a big turnaround quarter for AMD, as this segment has struggled for multiple quarters in a row.
But AMD's biggest and most important segment is its data center division, which competes head to head with Nvidia to supply the computing muscle necessary to train AI models. On the surface, 69% revenue growth to $3.9 billion looks great, but it missed analyst expectations by a wide margin. These analysts expected $4.14 billion in data center sales, so it wasn't a small miss.
Overall, AMD's management guided for $7.5 billion in sales for the fourth quarter. With the total coming in at $7.66 billion, it exceeded its own expectations, which is what investors should concern themselves with compared to Wall Street's expectations.
That didn't save the stock, as it fell more than 6% after reporting earnings and is now at its lowest stock price since late 2023. There are really no signs of AMD catching up to Nvidia in the all-important AI arms race, and the other divisions aren't enough to make up for its runner-up finish. However, a case can be made to own the stock if it provides a deep enough discount that it could be considered a value investment.
AMD's stock looks expensive by one measure and cheap by another
Despite AMD's shortcomings and its stock price reaching a low not seen in over a year, the shares still aren't all that cheap.
AMD PE Ratio data by YCharts
At 113 times trailing earnings, AMD is an incredibly expensive stock. But that valuation doesn't tell the whole story. AMD is expected to undergo massive earnings growth in 2025, as the average Wall Street analyst expected $3.31 in earnings per share (EPS) this year. That prices AMD's stock at 34 times forward earnings, which a far more reasonable price tag.
However, when Nvidia is priced at 28 times forward earnings, why would you consider buying the second-place company for more? That's where I'm at with AMD stock, and I think there are far too many best-in-class investment opportunities available to concern yourself with second-fiddle players like AMD.
