Chipmakers were among Wall Street’s favorites in 2023 because their hardware is crucial to countless industries. And as interest in artificial intelligence (AI) has grown, so has demand for graphics processing units (GPUs), the powerful chips needed to train and run AI models. . This has sent valuations skyrocketing for chip stocks like Advanced microsystems (NASDAQ:AMD)which has soared 128% over the past 12 months.
AMD has accelerated its expansion into AI as it prepares to meet the challenge NvidiaThe overwhelming domination of this market in 2024. At the same time, its diversified activities give it solid positions in several other high-growth niches. As a result, there are plenty of reasons to be optimistic about AMD’s future.
However, before you take action, it would be wise to consider both the positives and the potential negatives. So here are two reasons to buy AMD and one reason to sell.
A reason to buy: AMD has huge revenue potential in AI
AMD’s biggest competitor, Nvidia, saw its business explode in 2023 by cornering the AI GPU market. The company has about 90% market share in AI chips and its profits have soared. During its third fiscal quarter 2024, which ended October 29, Nvidia reported revenue growth of 206% year-over-year, while its operating profit increased 1,600% thanks to to the sharp rise in chip sales.
Nvidia’s success is promising for its rival, given that AMD will begin shipping its most powerful GPU ever in 2024. The new chip is specifically designed to compete with Nvidia’s offerings. In the meantime, Microsoft — a crucial customer for AMD — has already committed to using the GPU to power AI capabilities in its Azure cloud service.
Nvidia’s almost total control over AI chip market will probably be difficult to overcome. However, AMD doesn’t need to dethrone the leader to enjoy big gains here. According to a projection by Grand View Research, the AI market will grow at a compound annual growth rate of 37% through 2030 to reach a value of over $1 trillion.
With this kind of rapid growth, AMD will have ample opportunity to claim a lucrative slice of the AI pie.
Another reason to buy: a diversified economic model
The technology industry is advancing rapidly, with companies increasingly looking for high-power chips to take their products to the next level. As a result, AMD has partnered with companies in the market, supplying its hardware to cloud platforms, video game consoles, laptops, custom-built PCs, and more.
In fact, AMD is the exclusive chip supplier for SonyMicrosoft’s PlayStation 5 and Microsoft’s Xbox Series X|S, some of the best-selling gaming consoles in recent years. The success of these consoles has helped AMD’s gaming revenues increase by 30% over the past three years while its operating profit has increased by 72%.
A position in AMD stock allows investors to benefit from the growth of several industries. Its shares are up nearly 730% since 2019, significantly outperforming the Nasdaq Composite And S&P500. And the company is still in its early stages, with AI likely to propel the stock further on its current trajectory.
A reason to look elsewhere
AMD has strong long-term prospects. Its chips power a range of devices and systems, and it could see consistent and significant financial growth for decades. However, its stock price has soared in 2023 even as it has made heavy investments in AI that have yet to begin to have a positive impact on its profits. As a result, its shares are currently quite expensive by some valuation metrics.
These graphs compare the price/earnings ratios (P/E) and price-free cash flows from some of the biggest names in AI and technology. AMD has by far the highest numbers for both valuation metrics, meaning its stock offers the least value.
The company is expected to make serious headway in the AI segment with its soon-to-be-launched AI GPU. However, it is difficult to justify its high price. It may be worth investing in an alternative AI stock for now and keeping AMD on your radar to reconsider when its valuation returns to a more attractive level.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Cook has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool has a disclosure policy.
2 reasons to buy AMD and 1 reason to sell was originally published by The Motley Fool