Advanced Micro Devices (AMD -4.31%) has been a significant player in the semiconductor space for years, designing chips for everything from PCs to data centers. While many other semiconductor stocks have received a nice bump in their share price thanks to artificial intelligence (AI), AMD has thus far been left behind. The company's share price is down almost 8% over the past three years, while rival Nvidia has skyrocketed by more than 414%, as of this writing.
Does AMD's decline, plus its growing position in the AI chip market, mean the stock is a buy right now? Let's take a closer look and see if the answer presents itself.
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Making inroads toward AI, but not far enough
By some measures, AMD is doing well. The company's sales increased by 18% in the third quarter (ended Sept. 28), and diluted generally accepted accounting principles (GAAP) earnings per share spiked 161% to $0.47.
AMD plays second fiddle to Nvidia's powerful GPUs, but its processors are still popular enough to generate significant sales. AMD's data center revenue rose 122% year over year to $3.5 billion in the most recent quarter, and management estimates that data center sales for the full year will exceed $5 billion.
AMD's data center segment is growing fast as companies invest mounds of cash into building more advanced AI data centers. Nvidia's CEO Jensen Huang believes companies will spend $2 trillion over the next five years. While AMD is clearly benefiting from this AI trend, it's falling far short of Nvidia's position.
Nvidia holds an estimated 70% to 95% of the AI accelerator market, and AMD doesn't have much chance to chip away at that lead. Even with its impressive data center sales gains, AMD will be in Nvidia's rearview mirror for quite some time, making the case for buying its stock less compelling than owning Nvidia.
Segment slowdowns at a premium price
AMD has four business segments, two of which are growing (AI and processors for clients), and two that aren't (gaming and embedded processors). Gaming revenue fell 69% year over year in the third quarter to $462 million, and embedded sales retreated 25% to $927 million.
While AI is clearly the major draw for many potential AMD investors, it's not great to see half of the company's revenue segments experiencing falling revenue.
Another strike against AMD is that its stock is expensive. It has a price-to-earnings ratio of 112, compared to 55 for Nvidia and about 30 for the S&P 500.
The artificial intelligence market is full of stocks that are expensive right now, mostly due to their recent rapid share-price gains. But AMD, unfortunately, hasn't participated in those gains. If you're going to pay a premium for a stock, it should have some significant technological advantages over its competition or a leading position in its respective market. AMD has neither.
It's best to sit this one out
I understand why AMD would be on many tech investors' list of potential buys. It's clearly benefiting from a rush of AI infrastructure spending from some of its customers. But I don't think its stock is a good buy right now because AMD doesn't seem to have a chance of taking the lead in AI processing.
The company is trailing far behind Nvidia in AI processing market share and its stock is trading at a hefty premium. Therefore, it's probably best to put this stock on your watch list for now to see if its situation improves.
