Rare AI Chip Investment: Advanced Micro Devices

Published Date : 25/05/2025 

While Nvidia dominates the AI chip market, Advanced Micro Devices (AMD) is making significant strides in the data center segment. This article explores why now might be the perfect time to invest in AMD. 

Advanced Micro Devices (AMD) is experiencing robust growth in its data center business, but investors don't seem to be impressed. This could be a significant oversight, especially as the AI revolution continues to gain momentum.

Semiconductor stocks have been some of the biggest winners of the artificial intelligence (AI) revolution. AI chips are the brains that power and train generative AI models, helping businesses build new products and services at warp speed. They are ushering in a new wave of productivity, efficiency, and automation.

For the most part, one name emerges more often than others in the chip realm: Nvidia. I can't deny that what Nvidia has achieved over the last two years isn't impressive. Don't get me wrong—I'm very happy to be an investor in Nvidia stock. But as a long-term investor, I'm always looking for opportunities beyond the mainstream. Enter Advanced Micro Devices (AMD).

With a share price decline of 31% over the last year, AMD may not look like your cup of tea. However, I'd encourage you to keep an open mind. Let's explore how AMD is making inroads in the AI chip landscape, and why now looks like a lucrative time to buy the stock.

### AMD's Data Center Business is Making Serious Headway

AMD reports its financials across three business segments: Data center, client and gaming, and embedded. The data center segment competes directly with Nvidia, and recent trends in this business unit have really caught my eye. The table below breaks down AMD's data center financial profile over the last year.

| Data Center Segment | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 |

|---------------------|--------|--------|--------|--------|--------|

| Revenue (in billions) | $2.3 | $2.8 | $3.5 | $3.8 | $3.7 |

| Revenue growth (year over year) | 80% | 115% | 122% | 69% | 57% |

| Operating income (in millions) | $541 | $743 | $1,000 | $1,200 | $932 |

| Operating margin | 23% | 26% | 29% | 30% | 25% |

Data source: Investor Relations.

One thing to note is that over the last six months, it may look like AMD's chip business is beginning to show signs of slowing. However, the semiconductor industry tends to be cyclical. Moreover, Nvidia launched its newest graphics processing unit (GPU) architecture (Blackwell) during the fourth quarter, which likely served as some form of a headwind for AMD.

Nevertheless, AMD has nearly doubled its operating income in the chip business over the past year, while still accelerating sales by high double-digit percentages. Furthermore, the company is launching new architectures of its own later this year, and AMD's CEO Lisa Su sounds quite confident that these products will be a big hit with customers.

### ...and This Could Only Be the Beginning

Perhaps the biggest reason I'm excited about AMD's future is because of the company's proven ability to win notable customers. For example, Microsoft, Oracle, and Meta Platforms are all using AMD's MI300 accelerators in addition to their respective Nvidia GPUs. On top of that, Amazon—another Nvidia customer—recently made a strategic investment in AMD. This could signal partnership opportunities between AMD and Amazon's thriving cloud infrastructure business.

Over the coming quarters, my outlook is that AMD's data center business will continue generating a combination of revenue growth and margin expansion, thanks to encouraging shipment trends for MI325, MI350, MI355, and MI400 series chipsets.

### Is AMD Stock a Buy?

Right now, AMD's forward price-to-earnings (P/E) multiple is hovering well below its 10-year average. It seems to me that investors are questioning AMD's ability to capture rising AI infrastructure spend from the hyperscalers. What I find perplexing, however, is that AMD has already proven it can do this, but for some reason, the company isn't getting much credit for the growth in its data center business.

In my eyes, AMD is a no-brainer buying opportunity right now, and investors should consider taking advantage of the disparity in its current valuation multiples compared to historical trends. I think the stock is cheap based on forward earnings, and long-term investors should consider holding on to a position in AMD over the next several years. 

Frequently Asked Questions (FAQS): 

Q: Why is AMD a good investment in the AI chip market?

A: AMD is making significant strides in the data center segment, with notable customers like Microsoft, Oracle, and Meta Platforms using its AI accelerators. Despite a recent share price decline, AMD's financials show robust growth and expanding margins.

Q: How does AMD compare to Nvidia in the AI chip market?

A: While Nvidia is a dominant player, AMD is rapidly catching up. AMD has nearly doubled its operating income in the chip business over the past year and is launching new architectures that are expected to be well-received by customers.

Q: What are the key financial metrics for AMD's data center segment?

A: AMD's data center segment has shown strong revenue growth and expanding operating margins. Over the past year, revenue has grown by high double-digit percentages, and operating income has nearly doubled.

Q: What recent developments have boosted AMD's prospects?

A: AMD has won significant customers and partnerships, including a strategic investment from Amazon. The company is also launching new chip architectures that are expected to further strengthen its position in the market.

Q: Is AMD stock undervalued?

A: Yes, AMD's forward P/E ratio is currently below its historical average, suggesting that the stock is undervalued. This presents a compelling opportunity for long-term investors. 

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