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Advanced Micro Devices (NASDAQ: AMD), also known as AMD, has been a surprisingly underperforming tech stock over the past year. In 2024, it declined by 18% even despite its promising growth opportunities as a top artificial intelligence (AI) chip maker.
Over the past five years, the stock has achieved gains of around 140%, and it has typically been a market-beating investment. Is it due for a big bounce-back year in 2025, or is there more trouble ahead for AMD?
AMD's growth rate has been underwhelming
The name of the game in AI is growth. And that's been an area where AMD simply hasn't been delivering on lately. While the company is involved with developing AI chips, it has been lagging behind its key rival, Nvidia. While its chips may be more attractively priced, the company still has to show that demand for them will be strong.
It's little secret why Nvidia has been a red-hot investment while AMD has struggled. A look at their respective growth rates tells you the key reason behind their diverging stock valuations. While AMD's growth rate has been rising recently, it pales in comparison to Nvidia's stellar performance.
For AMD to rally this year, it needs to prove that its AI chips are competitive with respect to Nvidia. And for that to happen, its growth rate needs to improve -- drastically.
Despite its sell-off last year, AMD isn't a bargain buy
You might assume that because of AMD's falling value and Nvidia's continuing to rise higher, the former might be a better value buy than the latter. However, while AMD stock may have been underperforming, that hasn't resulted in it being a cheaper option for investors today.
Remarkably, due to Nvidia's phenomenal growth and impressive margins, it's still the better value buy when comparing the respective earnings multiples of these two tech companies.
While AMD's price-to-earnings ratio has been improving in recent quarters, it still has a long way to go in getting to Nvidia's much lower multiple. The bottom line is this is another area where AMD will need to show improvement in order to win over growth investors.
Should you buy AMD stock today?
Both AMD and Nvidia are promising AI stocks to own over the long term. AMD, however, still has to prove to investors that its AI chips offer formidable competition to Nvidia. If that happens, it should accelerate the company's growth rate and improve its earnings, which may shrink the gap on both of the charts above.
AMD is a bit more of a contrarian pick these days, but for investors who are willing to take a chance on the growing business, buying it now can lead to some significant gains ahead -- but that's only if the company delivers on stronger earnings numbers in upcoming quarters. Nvidia is a solid stock and is the safer buy, but since it's already among the most highly valued stocks in the world, it may be running out of room to rise higher.