Shares in Advanced Micro Devices (NASDAQ: AMD) have soared 65% year to date as investors grow bullish over its prospects in artificial intelligence (AI). The company is one of the world’s biggest chipmakers, supplying its hardware to countless businesses across tech.
However, AMD hasn’t had it easy in recent years. An economic downturn caused steep declines in the PC market, with dismal second-quarter earnings proving AMD is not out of the woods yet. Meanwhile, Nvidia‘s swift rise to the top of AI this year highlighted how far behind AMD has fallen in the industry.
Despite recent challenges, AMD remains a prominent name in tech worth learning more about. The company’s stock has risen 283% over the last five years, strengthening its outlook as it expands in AI.
So, here are three things about AMD that smart investors know.
1. AMD is losing ground to Nvidia
AMD and Nvidia have been in close competition for years, both active in markets such as gaming, data centers, PCs, and more. AMD has become one of the biggest names in central processing units (CPUs), while Nvidia has dominated the graphic processing unit (GPU) market.
AMD has seen success in the GPU space as well. However, it hasn’t been easy to contend with Nvidia’s 87% market share in the industry.
Nvidia’s years of dominance in GPUs have perfectly positioned it to flourish amid the current AI boom, as the chips are crucial to the market’s development. Meanwhile, AMD has been left playing catch-up. It announced a new flagship AI chip to its MI300 line this year, which is expected to be launched in 2024. Then, last month, the company announced it was acquiring Mipsology, a firm skilled in delivering AI software and solutions.
It will take time for AMD to see a return on its investment in AI. But the more time allotted to Nvidia’s rise, the more challenging it could become to compete.
According to data from FactSet, Nvidia is projected to earn $12 billion in data center sales, while AMD is expected to bring in $4 billion. The gap is widening, and AMD will want to act quickly if it is going to become a genuine threat in AI.
2. It’s vulnerable to a potential recession
On Sept. 7, Goldman Sachs decreased its estimated chance of a recession affecting the U.S. over the next 12 months to 15%. That figure is now in line with its historical average from past years, falling from 35% in March. However, fears of a recession continue to loom.
Credit card and auto loan delinquencies have surpassed pre-COVID-19 levels, with some analysts concerned that rising interest rates could trigger a recession. If the economy worsens, AMD’s business could be left vulnerable.
The company is active in consumer-reliant industries such as PCs and gaming, which would likely see further pull-back from shoppers. Meanwhile, the past year has shown companies could divert spending from traditional servers to AI, hindering AMD’s earnings. A reduced income could put the company on rocky ground as it works to expand its business, making it more challenging to keep up with competitors. As a result, investors may need to be patient with AMD’s recovery in the event of a recession.
3. An expensive option
AMD’s revenue fell 18% year over year in the second quarter after declines in most of its segments. The company continued to suffer from PC market headwinds and has yet to profit from its investment in AI. An earnings tumble alongside a stock rally this year has made its shares significantly more expensive than those of its peers.
The chart below shows AMD’s price-to-earnings (P/E) ratio has risen far higher than fellow chipmakers Nvidia and Intel.
An attractive P/E usually hovers around 20 or below, meaning AMD shares offer little value for now. As a result, if you’re itching to invest in AI or chip development, it might be better to look into companies such as Nvidia, Intel, or even Amazon, which are better priced for now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon.com, Goldman Sachs Group, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.