As Its AI Rivalry With Nvidia Gets Personal, Is AMD Stock a Buy?

The competition for artificial intelligence (AI) dominance is intensifying, with tech giants battling for market share. Chip companies like Nvidia Corporation (NVDA), Broadcom (AVGO), and Advanced Micro Devices (AMD) are at the heart of this rivalry, supplying the high-performance processors powering AI advancements.

While Nvidia leads with its cutting-edge graphics processing units (GPUs), rivals like AMD are looking to challenge its reign and take a share in the rapidly evolving AI landscape.

AMD has been making big moves to that end, including hiring Keith Strier - who served as Nvidia’s vice president of worldwide AI initiatives - to boost its global AI game and carve out a bigger slice of the tech pie. Plus, with fresh acquisitions ramping up its arsenal, AMD’s clearly gearing up to challenge Nvidia’s AI dominance.

With its AI rivalry with Nvidia intensifying, should investors consider AMD stock? Let’s take a closer look.

About AMD Stock

Santa Clara-based Advanced Micro Devices (AMD), founded in 1969 as a Silicon Valley startup, has evolved into a semiconductor powerhouse, currently valued at a $223.2 billion market cap. Known for its cutting-edge Ryzen processors and Radeon GPUs, AMD drives innovation in data centers, gaming, and PCs. 

The stock is down 39% from its all-time March peak at $227.30, but AMD is still up 30.2% over the past 52 weeks.

From a valuation perspective, AMD stock currently trades 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 mega-cap AI chip peers. While AMD stock is priced at a modest premium, it still looks reasonably valued in comparison with its hypergrowth peers.

AMD Edges Up After Q2 Earnings Beat

Thanks to its stronger-than-projected Q2 earnings results, reported after the close on July 30, shares of Advanced Micro Devices rose more than 4% the next session. The chip giant’s revenue rose 9% annually to $5.8 billion, driven by record data center and client segment revenue, and beat Wall Street’s $5.7 billion estimate. Its adjusted EPS grew 19% to $0.69.

Data Center revenue soared to $2.8 billion, up 115% annually and 21% sequentially, fueled by a surge in AMD Instinct GPUs and robust 4th Gen AMD EPYC CPU sales. Client revenue grew 49% year over year and 9% sequentially to $1.5 billion, thanks to strong AMD Ryzen processor sales.

A notable highlight was the robust performance of AMD's AI chips, with the new MI300X chip alone racking up over $1 billion in sales during Q2. This success bolstered AMD's next-gen Ryzen and EPYC product lines.

As of June 29, AMD’s cash and equivalents slightly dipped to $5.34 billion, but total debt stayed steady at $1.72 billion. Operating cash flow climbed 56.5% to $593 million in Q2, with free cash flow surging to $439 million.

AMD again raised its AI chip sales guidance, and now expects revenues to be approximately $6.7 billion, plus or minus $300 million, reflecting 16% annual and 15% sequential growth. Its non-GAAP gross margin is expected to be approximately 53.5%. Analysts tracking AMD anticipate the bottom line to grow to $0.71 per share, up 34% year over year in Q3.

Analysts expect the company’s profit to reach $2.56 per share in fiscal 2024, up 28.6% year over year, and rise another 70.7% to $4.37 per share in fiscal 2025.

AMD’s AI Strategy Challenges NVIDIA 

AMD’s competition with Nvidia has been intensifying. At June’s Computex 2024, AMD unveiled the MI325X AI accelerator, aiming to challenge Nvidia’s dominance with its impressive 288GB of HBM3E memory. Partnerships with heavyweights like Microsoft Corporation (MSFT), Meta Platforms (META), and Dell Technologies (DELL) underscore AMD’s push to gain traction in the AI space.

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

The deal is set to close in Q3, and AMD is banking on Silo AI’s expertise to boost its AI software capabilities, tackling one of the toughest challenges - developing cutting-edge AI models. This acquisition follows AMD’s recent buys of Mipsology and Nod.ai and over $125 million in AI investments in just the past year.

More recently, the $4.9 billion acquisition of ZT Systems bolsters AMD’s AI ambitions by adding expertise in designing large-scale computing systems critical for AI workloads. With ZT’s 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 increasing GPU sales and securing deeper relationships with data center customers.

Last week, AMD made a more personal acquisition by recruiting Nvidia’s former AI executive, Keith Strier, as its senior VP of global AI markets. Strier will drive AMD’s AI strategy under CTO Mark Papermaster’s guidance. 

With these moves, AMD is clearly gearing up for an all-out AI battle against Nvidia.

What Do Analysts Expect for AMD Stock?

On Aug. 20, Edward Jones spotlighted AMD with a fresh “Buy” rating, adding it to their Stock Focus List. The firm is optimistic about AMD’s prospects, driven by potential upside from the company’s Xilinx acquisition and AI-enabled PC upgrades.

Analysts were generally positive on AMD’s ZT Systems acquisition, with JPMorgan noting that it “should help to potentially close the gap” with Nvidia, though most firms caution that benefits from the deal may take time to play out.

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

The average analyst price target of $192.88 indicates a potential upside of nearly 40% from the current price levels. The Street-high price target of $265 suggests that AMD stock could rally as much as 91.8% from here.