Advanced Micro Devices (AMD) or AMD stock has been steadily recovering despite positive results, reflecting the sentiment swings of the past few months. It is trading well below its 52-week high of $227 and now appears to be undervalued when considering growth-adjusted valuation metrics and hardware offerings. To answer the dilemma in the title, the current decline could present an opportunity for investors to get into AMD, so I am bullish on AMD.

AMD exceeded expectations

When it comes to earnings, there’s no doubt that AMD is doing well. The company is perhaps Nvidia’s (NVDA) biggest competitor in the fast-growing data center/artificial intelligence chip sector, and it handily beat market expectations in its second-quarter earnings release. The Santa Clara-based company’s revenue reached $5.84 billion, beating analysts’ forecasts by $120 million, while non-GAAP earnings per share came in at $0.69, slightly above the $0.68 estimate.

When it released its second quarter, all eyes were on the company’s performance in the Data Center segment, where AMD reported record revenue of $2.8 billion, up 115% year over year. This growth was largely driven by strong demand for AMD’s AI offerings, including Instinct, EPYC and Ryzen processors. The company’s Client segment reported a 49% increase in revenue to $1.5 billion, driven by sales of Ryzen processors.

There is still room for improvement

AMD’s second-quarter earnings announcement wasn’t all positive. AMD’s gaming segment slumped, with revenue falling 59% year-over-year to $648 million, due to lower semi-custom sales. The embedded segment – systems for industrial and commercial applications – also saw a 41% decline, due to customers normalizing their inventory levels, so the company still has room to grow.

Despite these challenges, AMD management remains optimistic about future growth and expects third-quarter revenue of approximately $6.7 billion, driven by continued demand in the data center and client segments. CEO Lisa Su emphasized the role of AI and data centers, noting on the conference call that “our data center GPU (graphics processing unit) business is on a steep growth trajectory as shipments increase to a growing customer base.”

Is AMD really competing with Nvidia?

There is no doubt that Nvidia has a huge lead over its rival, which has had product expertise for over a decade. But that doesn’t mean that AMD has nothing to offer. Some even believe that the company has the edge when it comes to hardware. Let’s try to understand AMD’s strategy in competing with NVDA.

While Su is positive about the company’s trajectory, its growth will depend in part on its ability to challenge Nvidia, expand its market share and capitalize on new opportunities in the data center and AI segments.

Despite Nvidia’s proven methodology, Su’s AMD has taken a different strategic approach. Unlike Nvidia, it does not offer its customers a “full stack” of software and predefined libraries. Here it lags far behind. However, many analysts, including Kumar of Piper Sandler, say it offers the most powerful chips.

AMD’s AI chips, such as the MI300X, are designed to deliver improved performance and efficiency in AI inference tasks. AMD claims that these chips offer 40-60% better latency and throughput than Nvidia’s offerings, making them highly efficient for generative AI applications. However, Nvidia has refuted this claim.

In addition, some analysts have noted that AMD is moving toward a full-stack offering, pointing to the strategic acquisitions of Silo AI and ZT Systems. These stacks target the AI ​​data center market and are designed to improve AMD’s EPYC CPUs and Instinct GPUs.

In summary, while AMD is improving its software offering, the company’s main advantage seems to be the efficiency of its hardware. This probably means it will struggle to match Nvidia’s market share, but there’s nothing wrong with being number two in this huge market.

Is AMD’s valuation justified?

When we move on to the all-important valuation metrics, it becomes much easier to understand why I changed my neutral position to a bullish one.

AMD is, unsurprisingly, expensive in the short term, trading at 44.5 times non-GAAP earnings.

Nevertheless, the company is expected to experience incredible earnings growth over the medium term. In fact, AMD is expected to grow its earnings per share (EPS) at a compound annual growth rate of 43% over the next three to five years.

This results in one of the cheapest price-to-earnings-to-growth (PEG) ratios in the sector – 1.03. That sounds pretty attractive to me.

Is AMD stock a buy according to analysts?

On TipRanks, AMD stock is a strong buy based on 28 buy recommendations, six hold recommendations, and no sell recommendations given by analysts over the past three months. The average price target for AMD stock is $190.90, implying an upside potential of 30.43%.

View more AMD analyst ratings

Conclusion on AMD shares

Based on short-term metrics, AMD stock may look expensive, but its projected growth trajectory is impressive. Although the company will play second fiddle to Nvidia in the AI ​​and data center segment for some time, it has an impressive and competitive hardware offering that should drive growth going forward. Therefore, I am now bullish on AMD stock.

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