On June 3, semiconductor giant Broadcom posted extremely strong operating results for its fiscal second quarter, but management's sales guidance came in lighter than Wall Street's expectations. This sparked a sell-off of practically every semiconductor stock, but those with high exposure to the artificial intelligence (AI) revolution were particularly hard hit.
Advanced Micro Devices (AMD 5.59%) is one of the world's top suppliers of graphics processing units (GPUs) for data centers, which are the main chips used to handle artificial intelligence training and inference workloads, and its stock is down 10% from last week's all-time high as I write this.
However, AMD is still sitting on an eye-popping 12-month return of 300%. So could the recent dip be a buying opportunity, or have investors missed the boat?
Image source: The Motley Fool.
AMD is preparing to ship its best AI chips so far
AMD entered the data center GPU race in 2023 with the MI300X. It was designed to compete with Nvidia's H100, which was the leading-edge product at the time. AMD has since launched several new generations, including the MI350 and MI400 series, each more powerful than the last, and they have attracted major customers such as OpenAI, Oracle, and Meta Platforms.
But later this year, the company will start shipping commercial volumes of its MI450 series processors, which are its most powerful yet. These GPUs can be configured in AMD's new Helios data center rack, which includes highly specialized networking components and software to extract maximum processing speeds. In fact, the company says the MI450 series can deliver up to 36 times more performance than its previous-generation GPUs, thanks to the fully integrated Helios architecture.
AMD CEO Lisa Su says several major customers are inquiring about large-scale deployments for the MI450 platform. So far, OpenAI and Meta have each signed deals to deploy 6 gigawatts of computing capacity using AMD's chips in the coming years, and they will start with the MI450.
Data center revenue growth is expected to accelerate
AMD's data center segment generated $5.8 billion in revenue during its fiscal 2026 first quarter (which ended March 28). That was a 57% increase from the year-ago period, and made up more than half of the company's total revenue of $10.3 billion.
However, Su believes AMD's data center revenue could grow by more than 80% per year starting in 2027 as MI450 shipments ramp up. In other words, this segment is about to become an even bigger part of AMD's business, which explains why its stock sank last week after Broadcom's data center guidance hinted at a slight potential demand slowdown.
AMD stock is a difficult buy because of its sky-high valuation
Demand for AI data center chips exceeds supply, creating an imbalance that gives AMD significant pricing power, boosting its profit margins. As a result, the company's adjusted (non-GAAP) earnings soared by 43% to $1.37 per share in the first quarter.
NASDAQ: AMD
Key Data Points
However, based on its trailing 12-month adjusted earnings of $4.58 per share, its stock is trading at a price-to-earnings (P/E) ratio of 108.7, making it nearly 3 times as expensive as Nvidia, which has a P/E of 36.1. A premium of that magnitude is hard to justify for AMD, considering that not only is Nvidia the leader in the data center hardware market, but its sales are also growing much faster than AMD's -- hence it's still extending its leadership position.
According to Wall Street's consensus forecast (provided by Yahoo! Finance), AMD will grow its earnings to $13.08 per share in 2027, giving its stock a forward P/E ratio of 38.1. While that seems like a more reasonable valuation, it's still higher than Nvidia's current trailing P/E, so investors might simply be pricing AMD's expected growth too aggressively at the moment.
For that reason, I don't think it would be a good idea to pile into AMD stock at this point. Interested investors might do better to wait for a deeper pullback.
