The advent of artificial intelligence (AI) in 2023 has suddenly increased the demand for powerful computer processing power.This was a boon for semiconductor chip makers. Advanced Micro Devices (NASDAQ: AMD)producing high-performance chips suitable for AI.
This thirst for AI products drove the company's stock price from a 52-week low of $67.27 last January to a high of $151.05 in December. So does the dramatic jump in AMD's stock price mean it's already too late to buy?
As 2024 begins, stocks remain near 52-week highs. But could it potentially rise further? Learning more about AMD will help you assess whether it's worth your investment.
AMD's AI potential
Indeed, AMD stands to benefit from the rise of AI. for example, microsoft is incorporating AMD's AI chips into its Windows PC operating system as part of a multi-year partnership. With companies such as Facebook's parent company Metaeyeing AMD's AI processors as a lower-cost alternative to those offered by industry leaders Nvidia.
AMD CEO Lisa Su said demand for the company's data center-specific AI product, the MI300 accelerator, has been so strong that it will become “AMD's fastest-ever product to reach $1 billion in sales.” ” he said. To capitalize on this demand, AMD acquired his AI software company Nod.ai and his Mipsology in 2023 to strengthen its AI services. Nod.ai allows customers to automate the implementation and optimization of AI chips. Mipsology helps AI software run with data to make decisions, a process called inference.
The company's AI advances have helped boost AMD's stock price. But the next test will come when AMD releases its fourth quarter results later this year.
In the third quarter, the company had revenue of $5.8 billion, up 4% year over year. AMD expects fourth-quarter revenue to be about $6 billion, up from $5.6 billion in 2022. But for AMD's stock price to rise further, fourth-quarter sales will likely need to surge beyond those expectations.
Other considerations for AMD stock
Despite the upside potential, AMD's business is susceptible to the computer hardware industry's economic cycles over the long term. For example, if sales of PCs and game consoles decline, demand for AMD's chips will also decline, negatively impacting its bottom line.
The first quarter of 2023 was no different. AMD's revenue fell 9% year over year due to weak sales in the PC market. The drop in revenue in the first quarter was so significant that the company suffered a net loss of $139 million in the quarter, a sharp 118% drop from its 2022 net income of $786 million.
Another factor to consider is AMD's high stock valuation. Currently, the company's trailing 12-month price-to-earnings ratio (P/E) is an impressively high 1,156 times. Compare this to his rival Nvidia's PER of 72. AMD needs to achieve impressive financial results going forward to justify its current valuation.
Furthermore, the average price target for AMD stock by Wall Street analysts is $144.03 at the time of writing. This is another consideration to take into account when assessing whether AMD's stock price is too high to justify an investment at this time.
To buy or not to buy AMD stock?
The potential for AMD's business to boom due to the AI market is a compelling reason to invest, but short-term revenue growth appears to have already been priced into the stock. As a result, it's hard to justify buying AMD stock now given its current sky-high valuation.
This could change as AMD delivers on its promise of strong AI sales in the long term. Therefore, a wise approach is to wait for the price to fall and buy the stock at that point.
Another strategy is to buy a small position now in case the company manages to beat Wall Street's expectations with its fourth-quarter results. Then, use dollar-cost averaging techniques to add to your position when subsequent price declines occur.
Should you invest $1,000 in Advanced Micro Devices right now?
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Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Robert Izquierdo has held positions at Metaplatform, Microsoft, and his Nvidia. The Motley Fool recommends Advanced Micro Devices, Meta Platforms, Microsoft, and he has positions at Nvidia. The Motley Fool has a disclosure policy.
Is it too late to buy AMD stock? Originally published by The Motley Fool