Is AMD stock worth buying as AI rivalry with Nvidia gets personal?

Competition for dominance in artificial intelligence (AI) is heating up, with tech giants battling for market share. Chip companies like Nvidia Corporation (NVDA), Broadcom (AVGO), and Advanced Micro Devices (AMD) are at the center of this competition, delivering powerful processors that drive AI advances.

While Nvidia leads the way with its cutting-edge graphics processing units (GPUs), rivals like AMD are looking to challenge its dominance and grab a share of the rapidly growing field of artificial intelligence.

AMD is taking big steps toward that goal, including hiring Keith Strier—who previously served as Nvidia’s vice president of worldwide AI initiatives—to bolster its global AI game and carve out a bigger slice of the tech pie. And with recent acquisitions adding to its arsenal, AMD is clearly preparing to challenge Nvidia’s dominance in AI.

Should investors consider AMD stock as AI rivalry with Nvidia intensifies? Let’s take a closer look.

About AMD shares

Santa Clara, CA-based Advanced Micro Devices (AMD) was founded in 1969 as a Silicon Valley startup and has grown into a semiconductor powerhouse now valued at $223.2 billion in market capitalization. Known for its cutting-edge Ryzen processors and Radeon graphics processors, AMD drives innovation in data centers, gaming, and computing.

The stock is down 39% from its all-time high of $227.30 in March, but AMD shares are still up 30.2% over the past 52 weeks.

From a valuation perspective, AMD stock is currently trading at 40.87 times forward adjusted earnings — slightly above peers like Nvidia and Broadcom — while its price-to-sales ratio of 8.73 is lower than some of its large-cap AI chip peers. While AMD stock is trading at a modest premium, it still appears reasonably valued compared to its hypergrowth peers.

AMD gains value after beating Q2 results

Advanced Micro Devices shares rose more than 4% in the second session thanks to stronger-than-expected second-quarter earnings results reported after the close on July 30. The chip giant’s revenue rose 9% annually to $5.8 billion, driven by record revenue from data centers and its client segments, and beat Wall Street estimates of $5.7 billion. Adjusted EPS rose 19% to $0.69.

Data Center revenue increased to $2.8 billion, up 115% year over year and 21% sequentially, driven by growth in AMD Instinct GPUs and solid sales of 4th Gen AMD EPYC processors. Client revenue increased 49% year over year and 9% sequentially to $1.5 billion, driven by strong sales of AMD Ryzen processors.

A notable highlight was AMD’s solid AI performance, with the new MI300X chip alone achieving sales of more than $1 billion in Q2. This success bolstered AMD’s next-generation Ryzen and EPYC product lines.

AMD’s cash and equivalents declined slightly to $5.34 billion as of June 29, but total debt remained stable at $1.72 billion. Cash flow from operations increased 56.5% to $593 million in Q2, and free cash flow increased to $439 million.

AMD has once again raised its AI sales guidance and now expects revenue of about $6.7 billion, plus or minus $300 million, reflecting 16% year-over-year and 15% sequential growth. Non-GAAP gross margin is expected to be about 53.5%. Analysts following AMD are forecasting net income to rise to $0.71 per share, up 34% year-over-year, in Q3.

Analysts are forecasting the company’s fiscal 2024 earnings to be $2.56 per share, up 28.6% year over year, and then increase another 70.7% to $4.37 per share in fiscal 2025.

AMD’s AI strategy challenges NVIDIA

AMD’s competition with Nvidia is heating up. At Computex 2024 in June, AMD unveiled the MI325X AI accelerator, which aims to challenge Nvidia’s dominance with an impressive 288GB of HBM3E memory. Partnerships with giants like Microsoft Corporation (MSFT), Meta Platforms (META), and Dell Technologies (DELL) underscore AMD’s drive to gain ground in the AI ​​space.

On July 10, AMD announced plans to acquire Finnish AI startup Silo AI for $665 million in cash. Silo AI, the largest private AI lab in Europe, is known for creating custom AI models for the cloud and embedded markets.

The deal is expected to close in the third quarter, and AMD is counting on Silo AI’s expertise to enhance its AI software capabilities as it takes on one of its most difficult challenges – developing cutting-edge AI models. The acquisition follows AMD’s recent purchases of Mipsology and Nod.ai, and more than $125 million in AI investments over the past year.

The recent acquisition of ZT Systems for $4.9 billion strengthened AMD’s AI ambitions by adding expertise in designing the large-scale compute systems that are critical to AI workloads. With ZT engineers, AMD can more efficiently scale its AI GPUs to meet growing demand from cloud giants like Microsoft. This strategic move strengthens AMD’s position in the AI ​​market while driving GPU sales and securing deeper relationships with data center customers.

AMD made a more personal acquisition last week, recruiting former Nvidia AI executive Keith Strier as senior vice president of global AI markets. Strier will lead AMD’s AI strategy under CTO Mark Papermaster.

With these moves, AMD is clearly preparing for an all-out AI battle with Nvidia.

What do analysts expect from AMD stock?

On August 20, Edward Jones gave AMD a new “Buy” rating, adding it to its Stock Focus List. The company is bullish on AMD’s prospects, fueled by potential growth from the company’s acquisition of Xilinx and AI-enabled PC improvements.

Analysts have generally welcomed AMD’s acquisition of ZT Systems, with JPMorgan noting that it “should potentially help close the gap” between the companies and Nvidia, though most firms cautioned that the benefits of the deal may take some time to materialize.

AMD stock has an overall consensus rating of “Strong Buy.” Of the 36 analysts covering the stock, 29 suggest a “Strong Buy,” one recommends a “Moderate Buy,” and six support a “Hold” rating.

The average analyst price target of $192.88 indicates a potential upside of almost 40% from current price levels. The highest price target of $265 suggests AMD shares could rise as much as 91.8%.

On the date of publication, Sristi Suman Jayaswal did not hold (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For further information, please refer to Barchart’s Disclosure Policy here.