Is Advanced Micro Devices a Millionaire-Maker Stock?

In recent times, the surge in generative artificial intelligence (AI) has attracted significant investment into the technology sector. However, investors have grown more discerning about their choices. Currently, shares of Advanced Micro Devices (AMD) have plummeted by 32% from their peak price of $211 in March. This decline has led to AMD losing some of its allure, even though the company is closely tied to the AI boom through its data center hardware sales. Let’s analyze AMD’s strengths and weaknesses to understand whether it still holds potential for long-term wealth generation.

Why is AMD stock declining?

Determining the exact cause of AMD's stock decline is challenging, but a key factor seems to be its valuation. When AMD shares peaked in March, they were priced at an astonishing 340 times their trailing earnings. This signifies that investors may have overestimated the future growth of the company. Presently, AMD's trailing price-to-earnings (P/E) ratio stands at a more sensible 126. Even so, this is still twice the trailing P/E of Nvidia, which is at 63, and nearly five times higher than the average P/E of the S&P 500, which is 26, particularly when AMD's revenue growth has been relatively modest. In the most recent quarter, AMD saw its revenue rise by only 18% year-over-year to $6.8 billion, with gross margins increasing by just 3 points to 50%.

In contrast, Nvidia experienced a massive increase in its earnings, jumping 122% to $30 billion, while its gross margin increased by 5 points to 75%. Although AMD reported that its net income climbed by 191% year-over-year to $771 million, several influencing factors, such as fluctuating acquisition-related costs, could mean this level of profitability is not guaranteed in the future. AMD management cites an adjusted net income figure, which reflects a more modest growth of 33%, amounting to $1.5 billion.

The strength of the data center business

A significant difference between AMD and its competitor Nvidia is their level of involvement in the AI chip market, particularly via their data center divisions. Currently, data center sales comprise about 51% of AMD's total sales, a stark contrast to Nvidia's 88%. The struggles of AMD in sectors like gaming hardware, which saw a 69% decline in the third quarter, could heavily influence its overall performance.

This trend may persist as lower performances in AMD's other sectors push its data center growth to represent a more substantial portion of its business. The recent acquisition of ZT Systems for $4.9 billion is intended to bolster AMD's standing in the AI hardware marketplace. Moreover, AMD is innovating with its new flagship AI chips, including the Instinct M1325X, set to debut in 2025, aiming to rival Nvidia's forthcoming Blackwell chips.

Is AMD a millionaire-maker stock?

When I contemplate stocks with the potential to create millionaire investors, I often think of smaller, underappreciated companies with rapid growth rates. AMD, however, doesn't quite fit this mold, as its diversified business approach prevents its AI chip segment from dominating its growth narrative immediately. Furthermore, intense competition from Nvidia and others may curb AMD's revenue and profitability potential in the near future.

Nevertheless, following the significant drop in its share price this year, AMD is increasingly presenting itself as an attractive investment opportunity compared to before. While investors should temper their expectations regarding significant short-term gains, AMD's shares appear positioned for market-enhancing growth in the upcoming years. It may be prudent to wait until the current market volatility settles before committing to an investment in AMD.

AMD, stocks, investment