Shares of Advanced Micro Devices (AMD 3.20%) pulled back to start 2026 and were recently down about 8% year to date, although the stock has recovered. Investors are weighing the stock's high price-to-earnings multiple against risks in the AI chip market, where it is a distant second to Nvidia's leadership.
However, investors might be overlooking AMD's surging free cash flow and what this says about the real strength of the company's business.
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AMD's free cash flow nearly doubled year over year to $2.1 billion in the fourth quarter. This brought its full-year free cash flow from continuing operations to a record $5.5 billion, which followed the company's surging data center revenue.
During the fourth-quarter earnings call with analysts, CEO Lisa Su credited the company's revenue and free cash flow to "broad-based demand for high-performance computing and AI products." The company reported a 34% year-over-year increase in revenue, with adjusted net income up 42% -- also hitting a record of $2.5 billion.
NASDAQ: AMD
Key Data Points
While AMD faces risks competing in the AI chip market, the surging free cash flow reflects a business that might be more competitively positioned than is priced into the stock. The shares are trading at 42 times 2026 free-cash-flow estimates, but that valuation multiple drops to 16 on 2028 estimates.
AMD's upcoming data center products, such as its Helios computing platform for AI workloads, could sustain growth in higher-margin products that sustain its free cash flow momentum, making the stock a rewarding investment over the next several years.
