The company delivered a lackluster quarter, with its stock potentially overpriced compared to competitors.
All eyes have been on chip stocks amid a boom in artificial intelligence (AI) over the last year. These companies are developing the hardware needed for training AI models and completing intensive generative tasks, making them crucial to the market’s future.
A standout has been Advanced Micro Devices (AMD -2.38%), with the second-largest market share in graphics processing units (GPUs) — chips capable of running rigorous workloads for activities like gaming, AI, and cryptocurrency mining.
Analysts have repeatedly compared AMD to market leader Nvidia, questioning whether it will enjoy similar growth in the industry. Nvidia’s stock has skyrocketed 209% over the last year alongside soaring earnings, as it has dominated the AI chip sector. AMD is still in the early stages of its AI journey, with its stock rising 28% in the same period.
While AMD initially enjoyed significant stock growth thanks to Wall Street’s belief it would follow in Nvidia’s footsteps, AMD’s stock has dipped about 16% in the last three months as some excitement over the company’s potential has faltered.
So, is it too late to buy AMD stock, or will its business thrive over the long term?
Struggling amid rising competition
AMD posted its earnings results for the first quarter of 2024 on April 30. The company hit non-GAAP (adjusted) earnings per share of $0.62, beating analysts’ forecasts by $0.01. Meanwhile, revenue rose 2% year over year to $5.5 billion, about $20 million more than expected. While not bad, the results haven’t been enough to encourage investor excitement, with AMD’s stock up just under 1% since the earnings release.
The company’s stock has struggled against comparisons to Nvidia, as its revenue skyrocketed 262% in the same quarter and beat Wall Street expectations by more than $1 billion.
It wasn’t all bad news for AMD in Q1 2024, with its two highest-earning segments (data center and client) posting revenue growth above 80%. However, its gaming and embedded divisions stifled revenue growth, with sales tumbling 48% and 46% during the quarter.
Breaking through Nvidia’s estimated 90% market share in AI GPUs will be challenging. However, AMD has by no means given up, unveiling new AI chips earlier this month. The company’s MI325X accelerator is scheduled for release in Q4 2024. Meanwhile, AMD has shifted to a yearly release for its new chip designs, which could help it stay competitive.
Is AMD a better buy than rivals Nvidia or Intel?
Shares in AMD have risen more than 3,600% over the last decade, undoubtedly making it one of the best long-term buys in recent years. However, shifts in the market have made its stock a difficult choice compared to its rivals in 2024.
Nvidia’s spot atop the AI chip market when demand for GPUs is soaring suggests its stock is a reliable way to invest in the developing market. Its dominance in AI is unlikely to falter anytime soon. Meanwhile, Intel, another rising competitor to AMD, is expanding in chip manufacturing. The move could allow Intel to significantly profit from rising AI chip demand as it potentially becomes the go-to manufacturer for many companies.
Meanwhile, AMD feels slightly in no-man’s-land compared to its competitors with no niche in AI to dominate. The company has plenty of potential in tech, with positions in gaming, data centers, personal computers, and consumer products. However, recent earnings haven’t instilled much confidence in its immediate future.
Additionally, AMD’s free cash flow plunged 37% in the last 12 months, which indicates investing in its business could prove challenging in the near term.
Data by YCharts
Moreover, this chart shows Nvidia’s and Intel’s stocks are significantly better value than AMD’s with lower price-to-earnings (P/E) ratios. P/E ratio is a useful valuation metric calculated by dividing a company’s stock price by its earnings per share. And the lower the figure, the better the value. In this case, AMD’s stock appears considerably overpriced despite not much growth this year.
History and trends in the tech market suggest it isn’t too late to invest long-term in AMD. However, there are better options for now that could offer more reliability and value.
Dani Cook 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 recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.