Why Investors Should Buy-the-Dip in AMD (AMD) Stock

The share price of Advanced Micro Devices (AMD) — commonly referred to as AMD — has declined 11% over the past year. This is clearly disappointing for investors who were looking to cash in on the artificial intelligence (AI) boom. It’s also a stark contrast to fellow chipmaker Nvidia (NVDA), which has seen a 180% rise in its share price over the last 12 months. However, I believe the current dip may represent an opportunity for investors as AMD’s price-to-earnings-to-growth (PEG) ratio drops below one and the company’s impressive transition continues. In this article, I’ll explain why I’m bullish on AMD stock.

AMD’s Turnaround

The main reason I’m bullish on AMD is the company’s impressive transformation and trajectory. In 2015, the company was struggling with $4 billion in revenue and a $500 million operating loss. Fast forward to today, and AMD’s data center revenue for just one quarter has reached $3.5 billion, with consolidated net income of $771 million.

Under CEO Lisa Su, the company has excelled through a combination of strategic innovation, management excellence, and partnerships with industry giants such as Microsoft (MSFT), Alphabet (GOOGL), and Meta Platforms (META).

In recent years, the prevailing narrative has positioned AMD as something of a loser as Nvidia dominates the AI and data center markets. However, its financial performance, growth forecast, and technological advancements have positioned the company as an exciting investment prospect. And with AI and data center markets expected to grow at a compound annual growth rate (CAGR) of nearly 29% through 2030, AMD’s focus on these segments positions it as a serious competitor to Nvidia, not a loser.

AMD’s Bright Future

Let’s next take a closer look at AMD’s recent performance and its positioning within the AI landscape. In the last quarter, AMD’s data center segment surged, with year-over-year growth of 122% and quarter-over-quarter growth of 25%. This impressive feat more than compensated for declines in other segment areas.

AMD’s market share in the AI accelerator market, while still modest, is estimated to be between 5% and 7% as of 2024. While this highlights Nvidia’s dominance in the sector, it also represents a significant opportunity for growth, with analysts projecting that if AMD can increase its market share to 10% by the end of 2026, it could generate an additional $5 billion in sales. Beyond AI, AMD is steadily gaining ground in other markets. Its market share in the server CPU segment has climbed to 24.2%, a testament to its ability to compete with Intel (INTC) in a market once considered impenetrable.

This bullish outlook is supported by AMD’s technological developments and partnerships. The Ryzen AI PRO processors and data center CPUs and GPUs are tailored to meet the growing demands of AI and cloud workloads. The company is also a key supplier for AI applications like ChatGPT, further underscoring its credibility in the field. Moreover, while Nvidia’s margins remain the envy of the sector — with 75% gross margins — AMD’s gross margin rose 300 basis points in the last quarter to 54%. The current guidance suggests that this will be maintained going forward.

Compelling Valuation

Another reason for my bullishness on AMD stock is the valuation. AMD’s valuation is particularly attractive when considering its growth-adjusted metrics, particularly the PEG ratio. The company’s forward PEG ratio of 0.87 is significantly lower than the sector median of 1.82, indicating that AMD’s stock is undervalued relative to its expected earnings growth. This PEG figure represents a 52.1% discount compared to the sector, suggesting strong growth potential at a reasonable price.

Moreover, analysts project AMD’s price-to-earnings (P/E) ratio will decrease significantly in the coming years, from 36.3 times in 2024 to 13.3 times in 2027, reinforcing current growth expectations. This declining P/E trend, combined with the company’s low PEG ratio, presents a compelling valuation case for long-term investors.

Is AMD Stock a Buy?

On TipRanks, AMD has a Moderate Buy consensus rating based on 23 Buys, eight Holds, and zero Sell recommendations assigned by analysts in the past three months. The average AMD stock price target is $184.52, implying 52.4% upside potential. 

Read more analyst ratings of AMD stock

Conclusion

I’m bullish on AMD stock because of the company’s growth forecast and earnings outlook. AMD’s attractive valuation metrics, particularly its low PEG ratio and declining forward P/E, suggest the stock may be undervalued relative to its growth prospects. With a strong analyst consensus and substantial upside potential, AMD presents a compelling investment opportunity in the evolving microchip sector.

This bullishness is driven by the company’s impressive growth and transformation under Lisa Su’s leadership, rising from financial struggles to become a major player in the data center and AI markets. With the data center and AI markets expected to grow at breakneck speed, AMD’s market position appears shrewd despite Nvidia’s current dominance.