The semiconductor industry has broadly underperformed the S&P 500 so far this year.
With many AI chip stocks trading at hefty discounts, investors may be tempted to pour into the most obvious candidate: Nvidia.
Advanced Micro Devices has quietly built a budding data center business, but investors still appear to be discounting the company's long-run potential.
It's been a rough year for semiconductor stocks so far. As of market close on April 30, the VanEck Semiconductor ETF has fallen by 13%. To put that into perspective, this is more than double the losses witnessed in the S&P 500so far this year.
Among one of the more notable laggards in the semiconductor space this year is Nvidia, which has seen its market value drop by nearly $1 trillion. Indeed, the rare dip in Nvidia stock presents a tempting opportunity for growth investors right now. However, there's another name in the chip realm that I think is going overlooked.
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Let's dig into the entire operation at Advanced Micro Devices(NASDAQ: AMD). At just $100 a share, could AMD stock be your next winning ticket in the artificial intelligence (AI) revolution?
There's more than meets the eye with AMD's business
In financial analysis, looking at the aggregate totals for revenue and profit often doesn't tell the entire story around a business. Take AMD as a prime example. In 2024, AMD's revenue and net income increased by 14% and 92%, respectively.
Although these figures are impressive, they also don't really tell you a whole lot. Furthermore, most investors might simply compare these figures to Nvidia and determine that AMD is an inferior competitor given its smaller size and less robust growth.
Savvy investors understand that there's more to the picture. By taking a look at some of the more nuanced details around AMD, investors may come to see that the company is actually beginning to give Nvidia a run for its money.
AMD breaks its revenue and operating income into four buckets: data center, client, gaming, and embedded. In 2024, the data center and client segments stole the show. The data center business is particularly important, as this represents AMD's graphics processing unit (GPU) operation that competes directly against Nvidia. Moreover, the client segment includes sales from personal computers (PCs) and electronic devices -- which can serve as a proxy to help gauge AMD's chipset business outside of data centers.
Last year, revenue from the data center business grew by 94% year over year to $12.6 billion while operating income surged by 175% to $3.5 billion. The client segment rose by more than 5% year over year to $7 billion in revenue, and transitioned from an operating loss in 2023 to a profit of $897 million.
Clearly, these figures are much higher than the 14% revenue growth I referenced above. Unfortunately, AMD's gaming and embedded segments decelerated by 58% and 33%, respectively, last year. The declining sales and shrinking operating profits from gaming and embedded are essentially skewing the overall picture at AMD.
Image source: Getty Images.
Keep your eyes on AMD's data center business
While Nvidia still remains king of the AI chip realm, I would not sleep on the pace at which AMD is moving and its potential over the next several years. Over the last year or so, several behemoths in the AI space -- many of which are Nvidia customers -- have expressed interest in complementing their Nvidia infrastructure with alternative providers.
Some examples include Oracle, Meta Platforms, and Microsoft -- each of which is training various AI applications on AMD's MI300 accelerators in addition to using Nvidia chipsets. As AMD continues releasing next-generation GPU architectures combined with custom silicon solutions from cloud hyperscalers, I think AMD is in a position to force Nvidia's hand when it comes to price as GPUs are likely going to experience some commoditization in the coming years.
Why I think investors should buy AMD stock like there's no tomorrow
Right now, AMD stock trades at a forward price-to-earnings (P/E) ratio of 22.4 -- nominally below that of Nvidia. To add another layer to this analysis, take for instance the valuation disparity between AMD and Nvidia.
As of this writing, Nvidia boasts a market capitalization of $2.8 trillion. By comparison, AMD's market cap is $160 billion. While Nvidia is a much larger company than AMD in terms of revenue and profitability, I question whether its valuation should be 17 times that of AMD.
AMD is already proving that it can work with some of Nvidia's largest existing customers, and do so in a highly profitable manner. Furthermore, the financial and customer profiles explored above underscore that AMD is still in the middle of scaling its data center GPU operation, suggesting the company is positioning itself for more growth ahead.
In my eyes, investors are too hung up on AMD's overall growth and not attributing enough of a premium to the trends in the data center business. For just $100, investors can buy into AMD at a valuation of $160 billion -- a steep discount to the next closest competitor (Nvidia) all while enjoying long-run tailwinds fueling the AI infrastructure movement. I think AMD is positioned to thrive over the next several years and see the stock as a downright bargain at its current price point.
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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. Adam Spatacco has positions in Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, 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.
