Generative artificial intelligence (AI) has changed the way people compute. It has made its way into web searches, chatbots, and the content you read and view. Every industry has experienced the presence of AI in some way or the other. Nvidia is at the core of the AI revolution, powering the computer with its graphics processing units (GPUs). There was no worthy contender to challenge Nvidia in its own game. Then came Broadcom, with its Ethernet switches for data centre networking and custom AI application-specific integrated circuits optimized for specific workloads.
AMD stock underperforms other AI stocks
Nvidia and Broadcom enjoyed the AI rally, surging 171% and 105%, respectively, in 2024. One semiconductor stock that lay on the sidelines and underperformed in the AI boom was Advanced Micro Devices (NASDAQ:AMD). AMD stock slipped 10% in 2024 as it was late to join the AI game.
You may look at AMD’s case in two ways. First, the company was studying the niche it wanted to target and perfect its AI offering to avoid product failures just to grab a piece of AI. Second, the company adopted a wait-and-watch approach to identify the AI needs and work on the ones that generate the most returns.
AMD’s delays are not its denials. The company did come up with an EPYC product. AMD launched an end-to-end AI product suite of EPYC data centre central processing units (CPUs), Instinct accelerators, networking solutions, and Ryzen PRO CPUs for next-gen AI personal computers (PCs).
It was never AMD’s strategy to be the first mover. The company focuses on already established markets, giving customers a second-best alternative. It did so with Intel in PC and data center CPUs and Nvidia with GPUs. And this strategy worked for AMD.
AMD has enjoyed the laptop and game console revolution and is now set to tap the AI revolution. Here is why AMD is a stock to hold even though it underperformed other AI stocks.
Reason #1: Data centre TAM
AMD reported the first results of its AI EPYC data centre in the fourth quarter of 2023. In the last four quarters, its data centre revenue grew gradually while its profits soared aggressively as production yield picked up. Like Nvidia, AMD also outsources manufacturing to TSMC, which helps it reduce fixed overheads from manufacturing.
| AMD Data Center | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
| Revenue (Billions) | $2.28 | $2.23 | $2.83 | $3.55 |
| YoY | 38% | 80% | 115% | 122% |
| Operating Income (Billions) | $0.66 | $0.54 | $0.74 | $1.04 |
| YoY | 50% | 266% | 405% | 240% |
In the third-quarter earnings call, AMD chief executive officer Lisa Su, said, “In the data centre alone, we expect the AI accelerator TAM will grow at more than 60% annually to $500 billion in 2028. To put that in context, this is roughly equivalent to annual sales for the entire semiconductor industry in 2023.”
Advanced Micro Devices is acquiring AI companies to strengthen its offerings and get a piece of the AI total addressable market (TAM).
Reason #2: AMD’s AI PCs
The second reason to buy AMD is the upcoming PC upgrade cycle. The growing adoption of AI will drive the demand for next-gen AI PCs powered by AMD’s Ryzen AI Pro CPU series. The early signs of PC growth revival were seen in the fourth quarter of 2023.
| AMD Client | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
| Revenue (Billions) | $1.46 | $1.37 | $1.49 | $1.88 |
| YoY | 62% | 85% | 49% | 29% |
| Operating Income (Billions) | $0.06 | $0.09 | $0.09 | $0.28 |
| YoY | 136% | 150% | 229% | 97% |
Reason #3: AMD’s future growth opportunities
Beyond PC and data centres, AMD is leveraging its chips in networking and embedded space to offer AI at the edge. The adoption of the 5G ecosystem and the pick-up in autonomous vehicles will pave the way for future growth for AMD.
If you look at AMD’s earnings per share five years from now, the stock is trading at just 0.32 times price-to-earnings growth, the lowest since September 2023. It is an attractive stock to buy and hold for the coming three to five years.
