It's been tough going for Advanced Micro Devices (NASDAQ: AMD) lately. Analysts and investors see the semiconductor maker lagging in the artificial intelligence (AI) chip market. Clearly, Nvidia benefited from a head start in this space, and its dominance has proven lucrative.
But that does not mean AMD is completely out of the competitive race. Its MI300 series of AI chips reaps benefits from its significant sales increases, and these sales appear to drive a critical metric that could prove lucrative for the semiconductor stock.
Let's see why AMD deserves a little more respect than it's been getting lately.
What AMD's Q2 results showed
At first glance, AMD's results for the second quarter of 2024 do not appear noteworthy. In Q2, AMD reported revenue of $5.8 billion, rising 9% from year-ago levels. Unfortunately, this included a 59% revenue decrease in the gaming segment and a 41% decline in its embedded business.
While the results also included a 49% rise in client revenue, the area of interest is likely the data-center segment, which includes its AI chips. The $2.8 billion in revenue for this segment surged 115% yearly! More importantly, this means that the data-center segment now accounts for 49% of company revenue.
This is well above the 24% of the revenue the data-center segment claimed in Q2 2023. Nonetheless, Nvidia's data-center segment now makes up 87% of company's revenue, a dramatic figure considering that the data-center segment had driven less revenue than its gaming division two years ago.
If AMD moves closer to matching that dominance from the data-center segment, it should experience massive revenue growth, possibly bringing about considerable gains in AMD stock in the near future.
But can AMD compete?
The improvements do not mean that AMD has caught up with Nvidia technically. The company has a history of catching up to competitors, but in the AI chip field, it has not closed the gap. AMD claimed that it outperformed Nvidia when it released the MI300X. Nvidia quickly responded with the improved Blackwell chip, maintaining its industry dominance.
Nvidia is also commanding higher prices for its chips. CEO Jensen Huang says its latest Blackwell chip will cost over $30,000 per unit. In comparison, AMD's MI300X chip costs between $10,000 and $15,000.
However, the industry cannot meet current demand, meaning any AI chip made by any reputable chip company will likely sell. Moreover, Allied Market Research predicts that the AI chip market will expand at a 38% compound annual growth rate (CAGR) through 2032. In comparison, it also forecasts a 6% CAGR for the overall chip market through 2031, showing how significant AI chips are to the industry.
Furthermore, investors may have an opportunity. Although the stock had once been up more than 40% during the year, a pullback has wiped out its yearly gains.
Indeed, some of that had to do with valuation. A recent turn back to profitability left it with a high price-to-earnings (P/E) ratio. However, the recent pullback has taken AMD to a price-to-sales (P/S) ratio of 9, well under Nvidia's 32 sales multiple. This allows investors to buy AMD at a considerable discount and may help attract new investors as its data-center segment becomes an ever-larger revenue source for the company.
Investing in AMD
Ultimately, AMD looks like a company becoming increasingly dominated by its data-center segment, and this should profit AMD's shareholders in the same way it enriched Nvidia investors.
Admittedly, this fact does not negate the lackluster revenue growth or the current struggles in the gaming and embedded segments. Nonetheless, those segments will likely recover eventually, making it easier for the rapidly rising data-center revenue to become more apparent. That factor should soon bode well for AMD's financial and stock price growth.
Investors should not assume that AMD's AI chips will catch up to Nvidia, though that is possible. Instead, they should focus on the rising demand for AI chips and prepare for the time when the data-center segment becomes the company's dominant revenue source.
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Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
AMD Stock Is a Buy Thanks to This Improving Metric was originally published by The Motley Fool