Is AMD Stock a Buy on the Dip?

Shares of AI chip manufacturer Advanced Micro Devices (NASDAQ:AMD) have been flagging of late as investors begin to question the multiples at which some AI stocks trade.

AMD shares are still up nearly 13% on a 12-month basis but have lost effectively flat for the year. Much of this can be attributed to a Q3 earnings report that delivered results below what investors were expecting.

Is AMD a buy on the dip, and how badly has the company really stumbled this year?

AMD Is Expensive, But Growth Is Fast

One of the first things to look at regarding AMD is its valuation. Even with the stock dipping, shares of AMD still appear quite pricey. The stock trades at 42.2x forward earnings, 9.3x sales and 33.2x cash flow. Ordinarily, these metrics could all strongly point to AMD still being overvalued.

In AMD’s case, though, future growth could be the saving grace for the stock’s valuation. Shares are priced at about 1.5x expected earnings growth. While a bit on the high side, this is well below the ratio of 2.0 that typically signals substantial overvaluation.

Furthermore, AMD is expected to keep its earnings per share growing at an annualized rate of over 40% in the coming 3-5 years. Even if the company falls short of this rather high expectation, shares presently may very well be exchanging hands in a fair value range.

The view that long-term growth could support AMD’s high price tag also seems to inform Wall Street’s opinion of the stock. Analysts’ price targets for AMD range from $146 to $250 per share, a strikingly wide range with its median at $185 per share.

Though analysts clearly have difficulty reaching a consensus on how high AMD might go, all of the forecast prices are above the current price and the range of price forecasts implies a 12-month return of anywhere from 6.6% to 82.5% with a median expected return of about 35%.

Institutional investors continue to favor AMD’s growth potential for their own portfolios. Institutional ownership of the stock is currently in excess of 70%, and the value of stock bought by institutions over the last 12 months has been almost double the value of shares sold.

Looking at the other side of the table, short interest in AMD remains quite modest. About 3.5% of the stock’s float is currently sold short, and the expected coverage time for the shorts is just 1.5 days.

How Bad Is AMD’s Performance?

Although it caused a notable selloff, the last earnings report was far from negative. Revenues rose by 18% year-over-year to $6.82 billion, while net income surged by 158% to $771 million. Operating income rose even more drastically, rising by 223% to a total of $724 million.

Unsurprisingly, the company’s data center segment accounted for the vast majority of these gains. Revenues in this segment were up 122% over the year-ago quarter, more than making up for declines in the gaming and embedded systems segments.

Assuming current trends continue, this segment will likely be, by far, the most important growth driver for the company going forward.

AMD also appears to have some decent business opportunities in front of it. Specifically, the company is in a good spot to seize the lower end of the AI chip market. While AMD’s processors generally aren’t as powerful as NVIDIA’s, they have the advantage of being less expensive.

By providing better value for applications that may not require cutting-edge computing as it closes the gap by working on newer, more powerful chips, AMD has a real chance to keep delivering strong results and remain relevant in the AI hardware market.

Is There Room for AMD in a World Dominated by NVIDIA?

One of the other key questions surrounding AMD is whether the company can deliver on its expected growth rates with NVIDIA dominating the market for AI chips. While AMD has been posting impressive growth, NVIDIA remains the undisputed leader in this area with a market share of about 80%.

There likely is, however, still room for AMD to elbow in on the market by pursuing the value strategy outlined above. To begin with, the company has standing partnerships with the likes of Dell, Meta, Microsoft and Alphabet, all of which are important customers for its chips.

Though AMD almost certainly will never overtake NVIDIA in the medium term at least, it appears that major tech companies may view it as an important secondary source of chips that can prevent them from being fully reliant on NVIDIA.

Furthermore, the current AI chip market is defined by a delicate balance between supply and demand that creates opportunities for both NVIDIA and its competitors to thrive.

The market is already snapping up chips as quickly as they can be produced, and an active chip shortage could materialize by as soon as 2026.

For the foreseeable future, therefore, AMD likely won’t have to worry about its ability to sell its chips or a threat of excess NVIDIA chips being available to compete with them.

Will AMD Stock Recover?

Even after dropping after its most recent earnings report, AMD is likely to recover to $185 per share according to analysts consensus price target.

Collectively, they have baked in significant growth assumptions. The good news for current shareholders is that these forecasts seem reasonably well-founded based on both the company’s own performance and the current state of the market for its chips.

If demand for AI processing falls or AMD runs into unexpected business difficulties, however, the stock may very well still prove to be overvalued.

For investors with somewhat higher risk tolerances, AMD could present attractive upside potential. There appears to be no slowdown in demand for AI chips in sight, and the company’s existing set of partnerships will likely allow it to sustain growth even as NVIDIA solidifies its grip on the market. As such, AMD may present an opportunity to invest in AI hardware without having to pay the even higher prices associated with NVIDIA as the market leader.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.