Should you buy AMD stock’s decline?

After a strong upswing in 2023, things are getting hot on the capital markets this year – with the S&P 500 And Nasdaq Composite up 24% and 30% respectively by market close on December 20th.

Of course, this year’s hottest investment theme – artificial intelligence (AI) – remained unchanged from 2023. In the AI ​​space, semiconductor stocks have delivered some of the most lucrative returns in recent years.

But one stock didn’t seem to captivate investors Nvidia‘s main rival, Advanced micro devices (AMD -0.97%). As of this writing, shares of AMD are down 19% this year. Compared to Nvidia’s 172% return, investing in AMD seems a tough sell.

Below, I’ll break down some of the factors influencing AMD’s price action and assess whether now is a good time to buy the dip in AMD stock as it trades near a 52-week low.

Are investors missing the core of AMD?

At the end of October, AMD announced its third quarter financial results. The company’s revenue of $6.8 billion represented just an 18% year-over-year increase. While this may seem trivial compared to other AI darlings, I would encourage investors to look a little deeper.

AMD reports revenue in four main categories: data center, client, gaming and embedded. In the third quarter, AMD’s gaming and embedded segments declined 69% and 25% year-over-year, respectively. On the other hand, the company’s customer segment grew 29%, while its data center business grew 122% year-on-year.

Given the large differences between its various divisions, AMD’s overall revenue growth of 18% seems more reasonable. Additionally, one aspect that I think is being overlooked is that AMD’s data center business is growing at the same pace as Nvidia’s. This is not a dynamic that I would discount, and below I will explain in detail why.

Image source: Getty Images.

The long-term picture looks strong

Nvidia’s biggest advantage in the AI ​​arms race may not be its technological capabilities. Rather, Nvidia had no competition in the graphics processing unit (GPU) market for almost a year. This first-mover advantage allowed Nvidia to gain tremendous pricing power as demand for chipware steadily increased alongside increasing investment in generative AI.

However, AMD’s push into the data center GPU market is clearly starting to bear fruit. Both Microsoft And Metaplatformswho are well-known customers of Nvidia, are also supplementing their chip stack with AMD’s MI300 accelerators.

Considering AMD plans to launch new GPU lineups next year and into 2026, I’m cautiously optimistic that the company will be able to chip away at Nvidia’s dominant market share in the long term as the companies look to expand their AI -Differentiate investments rather than relying on a single provider.

Is AMD stock a buy right now?

One valuation metric that can be helpful in determining whether a stock is fairly valued is the PEG ratio. Unlike the price-to-earnings ratio, the PEG ratio takes into account earnings growth over a forecast period (i.e. five years). Generally, a PEG of less than 1 means a stock may be undervalued. Currently, AMD’s PEG ratio is 0.31 – meaning the stock is trading at a steep discount.

To take it a step further, AMD is currently trading at a forward price-to-earnings (P/E) ratio of around 24 – essentially in line with the S&P 500.

These valuation trends could indicate that investors have lost their enthusiasm for AMD and are no longer viewing the company as a lucrative growth opportunity. Looking at it another way, investors don’t seem to price an investment in AMD any differently than putting some money into the S&P 500.

For me, the bad sentiment surrounding AMD is largely unjustified. While the company is indeed lagging in some business areas, its potential in the GPU space alone should more than offset losses in non-core businesses like gaming.

Investors currently have a rare opportunity to buy a leading chip company at one of its lowest prices in recent memory. In my eyes, AMD is a bargain at its current valuation and I think now is an incredible opportunity to take advantage of the sell-off and prepare to stay for the long term as the momentum is just beginning.