Should one consider purchasing AMD Stock at the present moment?
Should one consider purchasing AMD Stock at the present moment?
Semiconductor manufacturer Advanced Micro Devices (AMD) has been experiencing a rough patch lately, despite a notable price surge last Monday. Despite this, AMD's stock is plummeting more than 40% from its yearly peak. As the year nears its end, share prices have dropped by 15% this year. Contrastingly, the S&P 500 index has grown by 25% during the same period.
The question arises: is AMD missing out on the AI market boom or is this a golden opportunity to invest in AI at these reduced prices? Upon further analysis, a third possibility appears more plausible – AMD is a "hold" in my view.
AMD's modestly growing AI market share
Rival company Nvidia dominates the AI accelerator chip market and how these chips are utilized in practical computing systems. However, AMD stands as a formidable competitor to Nvidia's market dominance.
In Q3's financial report, AMD's data center sales spiked by 122% year on year to reach $3.5 billion. This increase was primarily driven by AMD's Instinct AI accelerator series and EPYC line of high-performance server processors, which are essential components in training and operating large language models.
While AMD's data center sales cannot compare to Nvidia's $30.8 billion in the same period, it's not all doom and gloom.
Price to earnings (P/E)
AMD is harnessing its underdog status. Instead of attempting to set new AI standards, AMD ensures that its products are compatible with the same AI software and programming techniques as Nvidia's chips. By making the switch between hardware solutions seamless, AMD can attract existing Nvidia users to its offerings more easily.
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"Almost any model written for the standard framework, if you are running it on NVIDIA, you could run it on AMD Instinct MI300 out of the box, day 1, and it would work," AMD's Forrest Norrod said at a recent industrial conference.
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This strategy is indeed showing positive results. AMD's data center growth surpassed Nvidia's annual growth rate of 112% in the same quarter. In other words, AMD is making ground on the AI chip industry leader.
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Has the AI boom peaked?
AMD is a significant player in the AI hardware market, but it's not all sunshine and rainbows. The AI market's rapid growth may have overshot a bit, leading investors to reevaluate the long-term prospects of this boom.
Price to free cash flow (P/FCF)
As a result, many AI-related stocks have stagnated or even decreased in value recently. Nvidia's shares have barely increased by 0.1% in the past month, and Microsoft gained a mere 0.6% during the same period. Major AI system builders Super Micro Computer and Dell slipped by 7.1% and 17.2%, respectively.
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Perhaps this is a blessing in disguise. With the exception of Supermicro's tarnished reputation, none of these stocks are bargains despite their recent price drops. AMD has emerged as an especially costly option even compared to market darlings like Microsoft and Nvidia:
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| Valuation Metric | AMD | Nvidia | Microsoft || --- | --- | --- | --- || Price to earnings (P/E) | 112 | 54 | 36 || Price to free cash flow (P/FCF) | 131 | 58 | 43 |
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Invest in AMD with caution
AMD's tumbling stock chart may be disheartening for existing shareholders, but potential investors should view this as a chance to enter the market at lower prices. In fact, AMD's volatile stock could benefit from an even steeper price correction.
At the moment, the best approach to AMD's stock could be a risk mitigation strategy such as buying in thirds or setting up a dollar-cost averaging plan. These methods help manage price-dip risks by acquiring more shares when they're cheap and fewer when they're costly. This approach is wise when share prices are high and the direction of short-term movements is uncertain. I wouldn't consider investing in AMD without these robust price safeguards.
With a little patience, I wouldn't sell AMD stocks today, and I would approach buying with caution. The third option is to simply hold the stock and avoid any active transactions. Most AMD investors should probably avoid touching its buy or sell buttons until the stock calms down or connects to a stronger business trend.
In light of AMD's current financial struggles and the overall market trend, some investors might consider this a prime opportunity for investing in AMD's AI capabilities at reduced prices. Despite AMD making significant strides in its AI market share, with its Instinct AI accelerator series and EPYC processors driving a 122% year-on-year growth in Q3 data center sales, its price to free cash flow (P/FCF) is quite high compared to market darlings like Microsoft and Nvidia. Therefore, a cautious investment strategy, such as dollar-cost averaging or buying in thirds, could be beneficial for potential investors.