The stock market is in the midst of a sell-off right now, with the Nasdaq Composite down more than 9% from its recent all-time high. However, the decline in Advanced Micro Devices(NASDAQ: AMD) stock started one year ago, and it's down 51% from its best-ever level.
AMD supplies some of the world's best chips for a range of different applications, including a lineup of graphics processing units (GPUs) for the data center, which are designed specifically for artificial intelligence (AI) development. In fact, they are quickly catching up to Nvidia's (NASDAQ: NVDA) industry-leading GPUs in terms of performance.
AMD's data center business is coming off a record year, and the best is probably still to come. With that in mind, should investors use the 51% dip in AMD stock as the ultimate buying opportunity?
Image source: Getty Images.
2025 could be a record year for AI data center spending
Nvidia basically owned the entire AI data center market in 2023 with its H100 GPU, and the company continued to dominate in 2024 with the help of the newer H200. Data center operators are now clamoring to get their hands on Nvidia's new Blackwell-based GB200 GPU, which is capable of performing AI inference 30 times faster than the H100 in some configurations.
Unfortunately, AMD remains a step behind. The company launched its H100 competitor in late 2023, calling it the MI300X GPU. It successfully attracted top AI customers like Meta Platforms, Oracle, and Microsoft, some of which yielded better performance and cost efficiency compared to using Nvidia's H100. But AMD's Blackwell competitor, the MI350, is yet to launch.
AMD is shipping MI350 samples to customers in the current quarter, with production expected to ramp up into midyear. However, that gives Nvidia a serious head start because tens of thousands of GB200 GPUs are already on their way to some of the industry's leading AI developers.
But here's the good news. The MI350 is based on a new GPU architecture called CDNA (Compute DNA) 4, which could deliver 35 times more performance than CDNA 3-based chips like the MI300X. In other words, it's possible the MI350 won't just match the GB200, but potentially even outperform it.
Faster chips allow developers to process more data, more quickly, paving the way for much "smarter" AI models. Second, they tend to be more energy efficient, which saves data center operators significant amounts of money on electricity, which is one of the largest input costs when it comes to AI development.
According to a string of recent forecasts, Meta Platforms, Microsoft, Alphabet, and Amazon plan to spend more than $300 billion (combined) on data center infrastructure and chips during 2025. In other words, there is plenty of money to go around, but those tech giants want the best chips, so the MI350 could be the most important product launch in AMD's history.
AMD's data center revenue nearly doubled last year
AMD generated $25.8 billion in total revenue during 2024, and while that was an increase of just 14% compared to the prior year, the real story was beneath the surface of the headline number.
Its data center revenue came in at a record $12.6 billion for the year, which represented eye-popping growth of 94%. However, that was a mere fraction of the $115.1 billion in data center revenue generated by Nvidia during its fiscal 2025 (which ended on Jan. 26). It highlights how far behind AMD truly is, even though its chips are catching up from a performance standpoint.
That said, CEO Lisa Su thinks AMD's GPU sales will scale into the tens of billions of dollars annually over the next few years.
Away from the data center, AMD also generated $7 billion in revenue in its client segment, which is home to the company's industry-leading Ryzen AI chips for personal computers. That was a 52% increase from the prior year, and Su thinks this business unit will grow more quickly than the overall market during 2025, which implies AMD will snatch more market share from its competitors.
The reason AMD's top-line growth came in at just 14% despite soaring revenue increases in the data center and client segments, is because of sluggish performances in its other two businesses: gaming and embedded. This is also a key reason AMD stock fell so sharply over the past year.
The company's gaming revenue plummeted by 58% in 2024, as customers have been waiting for the release of the next-generation Radeon 9070 gaming GPU before parting with their cash. It just hit the shelves a few days ago, and the reviews have been spectacular, so it could help reignite AMD's gaming business in the current quarter.
As for the embedded segment, its revenue plunged by 33% last year due to weakness in key markets like industrials and communications. Its outlook is a little less clear, but AMD does expect it to grow in 2025.
Image source: Advanced Micro Devices.
AMD stock is trading at an attractive level
AMD generated $3.31 in non-GAAP (generally accepted accounting principles) earnings per share (EPS) during 2024, which places its stock at a price-to-earnings (P/E) ratio of 30.3. That's a 19% discount to Nvidia's current P/E ratio of 37.7, so the stock looks like a good value compared to its biggest rival.
Plus, Wall Street's consensus estimate (provided by Yahoo! Finance) suggests that AMD could grow its EPS to $4.70 this year, placing its stock at a forward P/E ratio of 21.3. In other words, the stock would have to rise by more than 40% during 2025 just to maintain its current P/E ratio of 30.3 (assuming Wall Street's earnings estimate proves to be accurate).
Considering the monumental hardware spending in the pipeline from some of the world's largest tech companies, AMD's data center business is likely to have another record year. Plus, the company expects its lagging gaming and embedded segments to return to growth, which will add fuel to its overall earnings potential.
As a result, the 51% decline in AMD stock has created a unique opportunity for investors to buy into this high-quality company at a very attractive valuation. However, since the AI story is still in the early stages, it will be a good idea for investors to maintain a long-term view of five years (or more) to maximize their chances of earning positive returns.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
