Is Advanced Micro Devices (AMD) stock worth buying?

Chip manufacturing company Advanced Micro Devices (AMD 4.88%) was pushed into the background Nvidia (NVDA -1.91%) in the artificial intelligence (AI) craze. A 40% return over the past year is nothing to scoff at, but it pales in comparison to Nvidia’s triple-digit results.

Whether the stock has further upside potential depends on how much impact artificial intelligence will have on AMD’s business in the coming years.

Big things are happening at AMD, and this long-term investor is taking a close look at the company’s financials to determine if they’re strong enough to justify buying shares now.

Here’s what I discovered in my search for AMD.

AMD’s Key Segments Are on Fire

No one is arguing that Nvidia dominates the market for chips used in data centers to run high-performance AI models. Nvidia’s Data Center segment had more than $22 billion in revenue in the first quarter, roughly equal to AMD’s the whole company I have done in the past four quarters. However, there are always niches in the broader market, and this is where AMD can make a living.

Even as an outsider, AMD’s Data Center sales grew 80% year-over-year in Q1. In addition, AMD’s AI capabilities extend beyond direct competition with Nvidia. For example, AMD is a major player in supplying chips used in personal computers and devices. This unit (customer segment) grew its sales 85% year-over-year in Q1 as computer makers began integrating AI technology. These two fast-growing units account for more than half of AMD’s business.

Unfortunately, AMD’s other two segments, Gaming and Embedded, offset that growth with sharp declines. While management expects Embedded revenue to recover once inventory issues are resolved, the Gaming unit is cyclical and in a slowdown. As a result, total revenue rose just 2% year over year in Q1. Analysts believe AMD’s full-year sales will be $25.5 billion, up 10% from 2023, so things could improve over the next few quarters.

Achieving 10 percent year-over-year growth is a solid result, even if it looks weak compared to Nvidia’s impressive results.

The overall picture looks clear

The hope is that the fast-growing Data Center and Client segments will get bigger and accelerate AMD’s overall growth. Analysts agree; current revenue estimates are $32.6 billion for 2025, up 27%. And that doesn’t look like a short-term fluke either. AMD CEO Lisa Su thinks the AI ​​chip market will grow to $400 billion by 2027.

Let’s do the math: Nvidia, with an estimated 90% market share, is on track to do just over $100 billion in data center revenue this year. That means a significant chunk of future market share is still up for grabs as broader demand for AI chips continues to grow. AMD grabbing even 5% of the $400 billion market would mean $20 billion in data center sales, or about twice what it’s on track to do this year.

Five percent market share is a small number, so even slightly better could make a big difference. Nvidia currently leads, but maintaining such a large market could be difficult. What if AMD can’t steal more market share? That would cloud the overall picture, but AMD still has other units that can create growth. Again, its second largest business segment (Client) just grew by 85%!

This is not an “AI or nothing” story.

Is AMD worth buying?

Investors need to consider how much of AMD’s future growth is already priced into the stock price.

Analysts estimate that AMD will earn $3.41 per share in 2024, up 28% from 2023. Additionally, estimates predict average annual earnings growth of 33% over the next three to five years, which makes sense if AMD’s Data Center and Client units continue to expand and effectively accelerate AMD’s broader growth. The stock is trading at 48 times estimated 2024 earnings, which would generally be a high price for most stocks.

However, the apparent and growing demand for AI chips could create growth that justifies such a high initial valuation. Assuming AMD delivers as expected and hits those estimates, investors could buy today and be happy with the results in three to five years.

Investors should keep a close eye on AMD’s results and keep in mind that the stock will become increasingly risky if the share price continues to rise. However, those who believe AMD can and will carve out a place for itself in AI are looking at a reasonable buying opportunity today.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.