The Nasdaq Composite index has entered correction territory as the tech-laden market index is now down more than 13% from the highs it achieved on Dec. 16 last year, and this souring market sentiment can be attributed to recent economic developments that have led investors to become risk averse.
From the tariffs being imposed by the Trump administration on countries such as Canada, Mexico, and China to a weaker-than-expected jobs report last month to weakening consumer confidence on account of a potential uptick in inflation, several factors have contributed to the Nasdaq's correction.
But this could also prove an opportunity in disguise for investors.
Market corrections can open up solid buying opportunities
A stock market correction refers to a decline of 10% to 20% in major market indexes. Investors, however, should not start panicking as history suggests that periods of corrections are followed by a sharp recovery. This is evident from the following chart.
The Nasdaq Composite corrected in early 2020 during the coronavirus pandemic, and that was followed by a period of sustained rise until the end of 2021. Again, a period of brutal sell-offs ensued in 2022, followed by outstanding gains over the next couple of years. Investors who were savvy enough to buy solid companies during these sell-offs are now sitting on pretty gains.
For instance, shares of Nvidia have shot up more than 3,000% since 2019 despite periods of volatility. So investors who held their nerves -- and their Nvidia positions -- over the past five years came out well off despite the sell-offs. That's why it is a good time for investors to look for a company that has the potential to rise remarkably in the long run.
Nvidia, no doubt, could be one of those names. However, there's another AI stock that's not only cheaper than Nvidia, but also has the potential to grow at a faster pace than the semiconductor bellwether. Let's take a closer look at that name.
Multiple catalysts could send this chip stock on a bull run
Advanced Micro Devices (AMD 2.33%) may not have delivered as stellar gains as Nvidia since the beginning of 2019, but it has still clocked respectable gains of 413%. However, the stock has pulled back nearly 24% during the latest Nasdaq correction since Dec. 16. As a result, AMD stock is now trading at a very attractive 21 times forward earnings, which is a discount to Nvidia.
Buying AMD at this valuation looks like a no-brainer since it has several catalysts that could supercharge its growth. From AI personal computers (PCs) to data center graphics cards to gaming consoles, there are multiple reasons why buying AMD right now could turn out to be a smart move. The chipmaker recorded a 14% increase in revenue in 2024 along with a 25% increase in non-GAAP earnings to $3.31 per share.
NASDAQ: AMD
Key Data Points
This resilient performance was driven by the company's record data center revenue, which nearly doubled last year as it gained traction in the AI graphics card market and won a bigger share of the server processor market. At the same time, AMD's client processor revenue jumped 52% in 2024 thanks to a recovery in the PC market along with the company's improving share in this space.
The company is confident it will achieve growth in both these end markets, which account for more than three-fourths of its revenue. For instance, AMD sees its data center graphics card business generating "tens of billions of dollars of annual revenue over the coming years" as compared to $5 billion in 2024. The company has ramped up its product development efforts and is on its way to launching its next generation of AI graphics cards in mid-2025.
What's worth noting here is that AMD's AI graphics cards are now finding traction among major cloud computing players such as Microsoft, IBM, and Oracle. Given that the global AI chip market is expected to generate more than $500 billion in revenue by 2033, AMD could witness a significant bump in its data center revenue from last year's levels of $12.6 billion even if it manages to remain the second-largest player in data center graphics cards with a double-digit share.
Meanwhile, the market for central processing units (CPUs) deployed in AI servers is expected to clock an annual growth rate of 28% through 2028, generating $26 billion in annual revenue. AMD has been consistently taking away share from Intel in this market. Its revenue share of the server CPU market stood at 35.5% in the fourth quarter of 2024 as per Mercury Research, up by 3.7 percentage points from the year-ago period.
Assuming it can control even 40% of the AI server CPU market's revenue in 2028, its annual revenue from this segment could exceed $10 billion (based on the estimated market size of $26 billion). All this indicates that AMD's data center business is well-placed for robust long-term growth thanks to its growing influence in both the CPU and graphics card markets.
On the other hand, AMD is also gaining share in PC CPUs. Its revenue share of server CPUs shot up by an impressive 8.4 percentage points year over year in the fourth quarter of 2024 to 23.8%. AMD is pushing the envelope in the client CPU market by rolling out new AI-focused processors. Not surprisingly, the company believes that its client segment revenue could grow at a faster pace than the market thanks to "the breadth of our leadership client CPU portfolio and strong design win momentum."
In all, continued market share gains in both the client and data center markets could pave the way for stronger growth at AMD. This explains why analysts are forecasting stronger growth of 42% in the company's earnings this year, followed by a 35% jump next year to $6.33 per share. Nvidia, on the other hand, is expected to register 50% earnings growth in the current fiscal year followed by 28% in the next one.
So, the potentially faster growth in AMD's earnings along with its cheaper valuation are the reasons why this AI stock is a solid buy amid the ongoing correction. Assuming AMD's earnings do hit $6.33 per share next year and it trades at even 25 times forward earnings at that time (in line with the tech-laden Nasdaq-100 index's forward earnings multiple), its stock price could jump to $158. That points toward 62% gains from current levels, giving investors yet another reason to buy this stock.
