When it comes to the semiconductor industry, chances are the top name that comes to mind is Nvidia. For the last two years, investors have been consistently reminded of just how dominant Nvidia's presence is in the world of high-performance chipsets, known as graphics processing units (GPUs).
While Advanced Micro Devices (AMD -2.12%) has started to build respectable momentum in the GPU world, the company largely remains in Nvidia's shadow. Unsurprisingly, AMD stock hasn't experienced anywhere near the same level of enthusiasm compared to Nvidia during the artificial intelligence (AI) revolution.
That might change sooner rather than later, however. Let's explore an important announcement investors may have missed from AMD, and assess why now could be a great opportunity to buy the stock.
What did AMD just announce?
On May 14, AMD announced that its board of directors approved a $6 billion share repurchase program. This is in addition to AMD's existing $4 billion buyback authorization, bringing the total amount to $10 billion.
Data by YCharts.
Over the last year, AMD stock has fallen roughly 30%, and in that time, you can see the company has been ramping up its buyback activity. I'll explain why these dynamics are important.
Why is AMD's stock buyback important?
AMD's financial profile can be hard to decipher at first glance. During the first quarter, AMD generated $7.4 billion in revenue -- up 36% year over year. While that looks solid, there's more than meets the eye here.
AMD has been experiencing deceleration across its gaming and embedded segments for quite a while now, and Q1 was no exception. Nevertheless, growth from the company's data center and client segments contributed enough to make up for the other business units.
The data center business currently makes up about half of AMD's total revenue while boasting a higher operating margin than the client and gaming segment. While these trends are encouraging, AMD's share price action suggests that investors are either uninspired or have their doubts over AMD's ability to compete with Nvidia.
While Nvidia had a first-mover advantage when it comes to data center GPUs, AMD's pace of innovation should not be glossed over. Over the last year, AMD has managed to attract a number of existing Nvidia customers such as Oracle, Microsoft, and Meta Platforms -- each of whom have become adopters of AMD's MI300 accelerators.
I think AMD's ongoing buybacks and the new $6 billion repurchase program signal that management sees investors aren't giving the company much credit for its AI chip business. At the same time, this segment of AMD's business is still in its early stages and has yet to scale. For this reason, management sees AMD shares as undervalued -- hence, the company has been buying back stock.
Image source: Getty Images.
Is AMD stock a buy right now?
While AMD's forward price-to-earnings (P/E) multiple may not appear cheap, the downward trend signals clear valuation compression that's hard to overlook.
Data by YCharts.
The timing of the new repurchase authorization is key. AMD is scheduled to launch a line of new GPU architectures later this year. The company's decision to increase its buybacks now could also signal that management is confident in the long-run demand prospects of this new launch, making the stock a good value at current levels.
As successor chip architectures continue to be released and AMD attracts more customers, the data center business should extend its lead as the biggest contributor of sales and profits for the company.
AMD stock is down nearly 50% from its all-time high, and investors with a long-run time horizon should scoop up shares, while they still trade at this reasonable price point. Management appears to have high conviction in the company's growth prospects.
