Chip stocks have captivated Wall Street this year as the artificial intelligence (AI) market has exploded. The demand for high-performance hardware has skyrocketed as more and more companies focus their businesses on the development of this sector. Chip manufacturers like modern micro devices (AMD -0.16%) And Nvidia are well-positioned to benefit significantly from AI in the long term, as bullish investors have driven their shares up 87% and 220%, respectively, since January 1.
Nvidia has been at the center of AI since the beginning of 2023, gaining a lead over its competitors and securing a large portion of the market share. However, AMD appears to be an attractive alternative for investing in the booming industry, which may offer even more growth potential.
So is it too late to invest in AMD stock? Let’s find out.
The most expensive stock in AI
AMD stock has risen sharply this year on prospects in the artificial intelligence space. However, the returns do not yet correspond to the valuation.
In 2022, macroeconomic headwinds drove lower spending in the PC market and led to sharp declines in AMD’s chip sales. The market has improved this year, but the company still faced remaining challenges.
In the third quarter of 2023, data center revenue fell 1% year-over-year, while the gaming segment fell 8%. In comparison, Nvidia’s data center and gaming revenue increased 279% and 81%, respectively, in the same quarter.
AMD’s rapid stock rise and dismal earnings have made the company one of the most expensive stocks in the AI space right now. The chart above compares the price-to-earnings ratio and price-to-free cash flow of some of the biggest names in tech and AI, with AMD stock losing on both fronts. The numbers show that AMD stock offers the least value among these companies.
The tech giant likely has a lot to offer in the long term, but it might be best to look for other investment opportunities until the share price falls to a more attractive price point.
Can investors expect a lot of growth from AMD stock?
AMD has kept investors bullish this year as it looks to challenge Nvidia’s AI dominance in 2024.
In June, the company unveiled the latest addition to its MI300 chip line, with what it claims is its most powerful graphics processing unit (GPU) ever, the MI300X. Since then, anticipation for the chip has grown Microsoft announced last month that Azure would be the first cloud service to start using the GPU. The MI300X will ship next year and could shake up the AI chip market if it offers competitive value for money.
Additionally, this year’s purchases of AI startups Nod.ai and Mipsology were further evidence of AMD’s significant potential in the market as the company expands its technology and resources. These acquisitions could help the company develop GPU software that allows developers to get the most out of its chips.
AMD will likely benefit a lot from AI in the next decade. However, the company’s high valuation suggests that much of its projected financial growth is already priced into its shares.
For reference: Nvidia had a similar problem. The chipmaker delivered excellent results in the third quarter of 2024 (ended October 2023), with revenue increasing 206% year-on-year and operating income increasing over 1,600%. However, Nvidia shares have actually fallen 7% since the earnings release.
Nvidia’s business has exploded alongside soaring sales of AI chips, but shareholders appear unwilling to invest further until the company can reach its current valuation.
Heading into 2024, AMD has a lot to offer. The stock price is astronomically high and investors are betting on the success of its new AI chips.
Judging by how much Nvidia sales have increased this year, AMD could be looking forward to significant increases in sales. However, this is unlikely to have a positive impact on the company’s share price.
As such, it’s too late to invest in AMD stock this year, but it remains a company worth keeping an eye on so you can pounce when the time is right.
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. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool has a disclosure policy.