In 2024, the competitive environment has shifted a bit. The rise of artificial intelligence technologies has prompted chipmakers to pour resources into products that benefit from the trend. Of course, Nvidia has a head start, but AMD has made important inroads. Below are 3 reasons Advanced Micro Devices stock remains a lucrative, long-term bet.
AI Demand and Advanced Micro Devices Stock
It’s always a good idea to read what contract chip manufacturers like TSMC (NYSE:TSM) and Samsung (OTCMKTS:SSNLF) are saying about market conditions in their earnings report.
In their first quarter earnings print, TSMC reported revenues rose 16% to $18.5 billion, blowing past Wall Street’s initial estimates. Sustained demand from Nvidia for AI chips has helped push TSMC into a new era of growth. Samsung also reported a turnaround in profit due to its semiconductor business.
This spells good news for a company like AMD that plans to sell billions of its MI300X chip this year. Demand for AI has not satiated, and an entrance into the burgeoning space will be a boon for Advanced Micro Devices stock.
Intel Has Been Successfully Kept at Bay
Over the years, AMD has stolen market share from a company that was once America’s crown jewel of the semiconductor space: Intel.
While Intel was focused on leveraging its own chip manufacturing capabilities, AMD chose a fabless model of chipmaking. This means instead of manufacturing in house, AMD chose contract manufacturers like TSMC to manufacturer its CPUs and GPUs.
Unfortunately, Intel has fallen behind its chipmaking capabilities. In its Q1’2024 earnings report, Intel’s Foundry business, which deals with chipmaking, saw its revenue growth compress.
Intel also reported sluggish revenue in its Data Center and AI business, which is attempting to compete with Nvidia directly and will also be in competition with AMD as it begins to role out its AI chips.
While Intel will remain an important player, the unit economics remains on the side of AMD and Nvidia. Ultimately, this gives important breathing room to AMD to capture market share in the AI space.
Valuation is a Bit High
An aspect of AMD’s stock that could make some investors hesitant is the chipmaker’s current forward-looking valuation. As of last Friday, AMD trades at 43.5x forward earnings, which is below competitor Nvidia’s 35.1x forward earnings multiple.
Driving the divergence is Nvidia competitive stature in the artificial intelligence space; Wall Street analysts also expect Nvidia to reap a lot of income from being a dominant player. Most of what’s driving AMD’s financial figures to date is the CPU and GPU products going into PCs and servers, and the electronic space is still recovering.
However, Wall Street remains optimistic about AMD’s share price prospects. According to Koyfin, there are 48 analysts covering AMD, and 37 of which have given the chipmaker’s shares a “Buy” or “Strong Buy” rating. Moreover, AMD’s current average 12-month price target implies a more than 25% potential return.
Investment bank TD Cowen was among those who have recently upgraded AMD’s price target. In mid-April, TD Cowen increased their price target from $185/share to $200/share.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.