Is Advanced Micro Devices (AMD) Stock a Buy?

Chip company Advanced Micro Devices (NASDAQ: AMD) has been relegated to second fiddle to Nvidia (NASDAQ: NVDA) in the artificial intelligence (AI) craze. The stock's 40% returns over the past year aren't anything to sneeze at, but they pale in comparison to Nvidia's triple-digit performance.

Whether the stock has further upside depends on how much AI can impact AMD's business over the coming years.

Big things are happening at AMD, and this long-term investor is going deep into the company's finances to determine if it's good enough to justify buying the stock now.

Here is what I found in my exploration of AMD.

AMD's most important segments are on fire

Nobody is arguing that Nvidia dominates the market for chips used in data centers to run powerful AI models. In Q1, Nvidia's Data Center segment revenue was over $22 billion, roughly what AMD's entire company did over the past four quarters . However, there are always niches within a broader market, and that's where AMD can earn its living.

Even as an underdog, AMD's Data Center sales grew 80% year over year in Q1. Additionally, AMD's AI opportunity extends beyond direct competition with Nvidia. For example, AMD is a significant player in supplying chips used in personal computers and devices. This unit (Client segment) grew its sales by 85% year over year in Q1 as computer manufacturers started integrating AI technology. These two fast-growing units are over half of AMD's business.

Unfortunately, AMD's other two segments, Gaming and Embedded, offset that growth with steep declines. While management anticipates that Embedded revenue will grow once inventory issues pass, the Gaming unit is cyclical and in a slow period. The result was that total revenue grew just 2% year over year in Q1. Analysts believe AMD's full-year sales will come in at $25.5 billion, a 10% increase over 2023, so things could pick up over the next few quarters.

Hitting 10% growth for the year is solid, even if it looks bad compared to Nvidia's eye-popping results .

The big picture looks bright

The hope is that the fast-growing Data Center and Client segments become larger and speed up AMD's overall growth. Analysts agree; current revenue estimates are $32.6 billion for 2025, which would work out to a 27% increase. This doesn't look like a short-term fluke, either. AMD's CEO, Lisa Su, believes the AI chip market will grow to $400 billion by 2027.

Do the math: Nvidia, with market-share estimates as high as 90%, is on track for just over $100 billion in data center revenue this year. That means a significant amount of future market share is still up for grabs as the broader demand for AI chips continues climbing. AMD grabbing even 5% of a $400 billion market would be $20 billion in Data Center segment sales, roughly double what it's on pace for this year.

Five-percent market share is a small number, so even doing a little better than that could make a big difference. Currently, Nvidia is the runaway leader, but holding onto so much of a large market can be hard. And if AMD can't steal any more market share? That would dim the big picture, but AMD still has other units to create growth. Again, its second-largest business segment (Client) just grew 85%!

This isn't an AI-or-nothing story.

Is AMD a buy?

Investors must consider how much of AMD's future growth is already in the share price.

Analysts estimate AMD will earn $3.41 per share in 2024, up 28% from 2023. Additionally, estimates call for annual earnings growth averaging 33% for the next three to five years, which makes sense if AMD's Data Center and Client units continue to grow and successfully accelerate AMD's broader growth. Shares trade at 48 times estimated 2024 earnings, which would generally be an expensive price tag for most stocks.

However, the apparent and growing demand for AI chips could create growth that justifies a high starting valuation like this. Assuming AMD delivers as hoped and hits those estimates, investors could buy today and be pleased with the results three to five years from now.

Investors should closely monitor AMD's performance and remember that shares will become increasingly risky if the stock price keeps rising from here. However, those who believe AMD can and will carve out its space in AI are looking at a reasonable buying opportunity today.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy .