Among investment opportunities in the artificial intelligence (AI) realm, semiconductor stocks have become a top choice. Nvidia has been the most popular among chip stocks over the last two years, and for good reason. The company's graphics processing units (GPUs) play an important role in generative AI development, and companies around the world can't seem to get enough of what Nvidia has to offer.
While it remains a solid opportunity at the intersection of semiconductors and AI, I see another stock that looks like a better value right now.
Below, I'm going to break down the current price action around Advanced Micro Devices (AMD -1.05%). And I'll explain why I think the company is well positioned for years of robust growth, despite a tough matchup with Nvidia.
What is going on with AMD stock?
The chart below illustrates the price movements among AMD and a number of leading semiconductor stocks as well as the VanEck Semiconductor ETF over the last year. Unlike its peers, shares of AMD have dropped considerably -- and as of Jan. 14, the stock is hovering near a 52-week low.
Considering how integral chips are for AI development, what's causing AMD stock to sell off while its competition witnesses overwhelming support from investors?
From what I can gather, the poor sentiment surrounding AMD boils down to growth -- or lack thereof. Right now, the company's top line is growing at a modest 18%. When compared to Nvidia, with its nearly triple-digit sales growth, it appears underwhelming. However, I think investors are missing the forest for the trees.
Image Source: Getty Images
AMD is growing faster than you probably realize
While AMD's overall revenue growth may appear muted when benchmarked against the competition, it's crucial to take a look at the finer details before jumping to a conclusion. The company breaks its revenue down into four major categories: data center, client, gaming, and embedded.
At the moment, the company's gaming and embedded segments are not growing at all. Unfortunately, this lack of growth is cannibalizing the areas of the business that are thriving. Per the company's most recent financial report, the data center operation grew by 122% year over year -- nearly identical to that of Nvidia's data center GPU segment.
Despite this impressive growth, AMD trades at a price/earnings-to-growth ratio (PEG) of just 0.30. This suggests that analysts may be missing just how robust the company's data center business is and therefore muting its growth estimates. Note that a stock with a PEG ratio below 1 generally implies that it is undervalued.
Why I think AMD stock could break out in 2025
This year is going to be an interesting one for the chip space. Investors and Wall Street analysts are going to be assessing every possible statistic surrounding Nvidia's new Blackwell GPU -- which is reportedly already sold out for the next 12 months. This is good news for Nvidia on the surface, but I think AMD has a big opportunity looming in the background.
Namely, these supply-and-demand dynamics provide an interesting opening for AMD in that the company can compete on price and offer an optimal solution when businesses simply cannot get their hands on Nvidia's GPUs. Such an idea is not unreasonable to buy into, either.
A big tailwind for AMD over the last year has been notable adoption of its MI300 accelerators by hyperscalers including Oracle, Microsoft, and Meta Platforms. While each of these companies relies heavily on Nvidia's GPU architecture as well, they have made moves to diversify their AI infrastructure by complementing their respective Nvidia stack with products developed by AMD.
When you take into account that AMD already has a lineup of successor chips scheduled to be released throughout 2025 and 2026, I think the company has a good chance of taking advantage of the ongoing demand shaking throughout the semiconductor landscape by offering a number of alternative solutions to Nvidia's product suite -- all at a more reasonable price point.
To me, investors should be laser focused on the growth trends around AMD's data center GPU segment. If the company can continue accelerating this specific part of its business profitably, then I think it's only a matter of time before investors begin to take note of its scale, and shares could begin to break out.
I see AMD as a compelling long-term opportunity for AI investors and think the ongoing depressed price action makes now a lucrative time to buy the stock.
