The Best Artificial Intelligence (AI) Stock to Buy Isn't Nvidia

AMD’s Strategic Moves: Unveiling Growth in AI and Semiconductors Artificial intelligence (AI) is a hot topic in the world of technology firms this year. Microsoft got things started with a multibillion-dollar investment in OpenAI, the developer of ChatGPT. Other Big Tech companies, such as Amazon and Alphabet, quickly followed suit, each investing in a competing generative AI potential named Anthropic.

While these strategic investments were enough to pique the interest of Wall Street and regular investors alike, I believe the real party began in May when chip leader Nvidia published earnings for its first quarter of fiscal 2024, which ended April 30. The stock has increased by almost 60% after demonstrating its superior performance in data center services and innovations in graphics processor units (GPUs).

However, over the same time period, Nvidia’s main rival, Advanced Micro Devices (AMD -0.73%), has only gained roughly 8%. Given how much interest there is in chip stocks and AI exposure, the lack of movement in the stock is almost shocking. In some ways, it appears that the investment world has abandoned AMD in favor of Nvidia.

Following the release of AMD’s third-quarter earnings, I believe the firm highlighted once again how robust its operations are and why a long-term investment is enticing. Let’s dissect the earnings report and examine the steps the corporation is taking to compete with Nvidia.

Furthermore, a closer look at management’s long-term perspective in relation to the stock’s current price should assist support the thesis as to why now appears to be a fantastic time to buy some AMD shares.

Another Excellent Performance

AMD reported total revenue of $5.8 billion for the fiscal quarter ended September 30, a 4% rise year over year. AMD’s data center division, which generated $1.6 billion in sales, was the largest contribution to revenue. Although there has been little change year over year, there are some under-the-radar reasons to anticipate that this category may experience rapid growth sooner rather than later.

I wrote on AMD’s acquisition of Nod.ai, a machine learning start-up, about a month ago. As previously stated, AMD has a solid track record in mergers and acquisitions, and I saw the Nod.ai transaction as yet another astute decision by management. What makes Nod.ai so appealing is that its technology meshes perfectly with AMD’s open-source goal for its AI roadmap. In AMD’s third-quarter investor presentation, I learned that the business has completed another acquisition, this time of a startup named Mipsology.

Nod.ai and Mipsology are now integral parts of AMD’s data center operations. Although AMD’s current growth trajectory appears routine, I believe the company’s ability to quickly find innovations that can merge with its own core services should not be underestimated.

Furthermore, AMD has yet to benefit much from either of these transactions. Nod.ai and Mipsology, in my opinion, represent a once-in-a-lifetime opportunity to breathe fresh life into AMD’s data-center business, and investors should be anything but disheartened by the company’s current performance.

Another significant topic to consider is AMD’s client base. AMD reported $1.5 billion in customer revenue for the September quarter, a 42% increase year over year. This was the most positive portion of the call for me, as management informed investors that the return to growth was driven in large part by PC market normalization. For the past three quarters, management has blamed its dismal performance in the client market on falling PC demand. This relationship isn’t altogether unexpected given the consequences of inflation and rising interest rates on consumer discretionary expenditure. Nonetheless, given the long-term impact of these macroeconomic issues on AMD’s business, it’s not unexpected that some investors lost patience and exited the stock.

With a return to client growth and some interesting potential in the data-center section via acquisitions, investors may be interested in what management has to say about the future.

Remember to consider the long term.

During the earnings call, management provided investors with a forecast for the fourth quarter as well as a look ahead to next year. Management predicted a strong double-digit percentage increase in both data-center and client segment revenue in the fourth quarter. While this is encouraging, it was the comment about next year that piqued my interest.

Management in the data-center business forecasted $400 million in sales from data-center GPUs in Q4. However, investors were informed that AMD expects revenue from data center GPUs to exceed $2 billion by 2024. The rapid progress we are making with our AI road map execution, according to management, is the spark driving this increase.

To say AMD is optimistic about its AI roadmap would be an understatement. AMD is establishing the groundwork for long-term growth based on AI. However, the majority of headlines and investor conversations appear to center on Big Tech, especially Nvidia. AMD, in my opinion, represents an underutilized AI possibility that is not receiving enough credit for its recent moves.

Should you put money into AMD?

A stock can be valued in a variety of ways. Because my AMD thesis is based on the long-term picture, I will examine the company on a forward price-to-earnings (P/E) ratio. Forward P/E ratios might be valuable because they account for expected future growth. At the time of writing, AMD stock has a forward P/E ratio of about 31, which is substantially higher than the S&P 500’s forward P/E ratio of about 20.
While this may imply that AMD stock is overpriced, I disagree. AMD is a growth stock, and it trades as such. Given the cyclical nature of the semiconductor business and the current state of AI sentiment, such significant changes in AMD stock are not out of the question on any given day.

There is more than enough evidence, in my opinion, that AMD has strong growth prospects. I would not make an investment decision until the acquisitions began to meaningfully benefit the business. On the call, management did enough to reassure me that the steps it is making are the right ones to maintain momentum and market share against Nvidia. Although the stock does not appear to be cheap, I believe AMD’s growth prospects are higher than the broader market, and hence the premium is justified. I believe that now is an excellent time to dollar-cost average into a surefire leader at the convergence of AI and semiconductors.

Stay Updated about the latest technological developments and reviews by following TechTalk, and connect with us on Twitter, Facebook, Google News, and Instagram. For our newest video content, subscribe to our YouTube channel.