Up 300%, Is AMD Stock Still a Buy?

For tech sector investors, generative artificial intelligence (AI) has been the gift that keeps on giving, and chipmaker Advanced Micro Devices (NASDAQ: AMD) has been among the biggest winners. But after seeing its shares soar by more than 300% over the last 12 months, can the stock maintain its bull run for much longer?

Let's dig deeper to see what the coming months might have in store for this top AI hardware company.

The data center boom is in full swing

Large language models (LLMs) are generally trained and operated through vast data centers that house thousands of graphics processing units (GPUs) and specialized AI accelerator chips produced by companies like Advanced Micro Devices. And demand shows no signs of slowing.

Industry leaders seem totally convinced that AI will transform the world. For example, Amazon's CEO Andy Jassy calls the technology a "once-in-a-generation" opportunity. And the hyperscalers are putting their money where their mouths are, with CNBC reporting that total spending could hit $700 billion this year. The situation has led to high demand and relatively tight supply, which is supercharging AMD's operational results.

First-quarter revenue jumped 38% year over year to $10.25 billion, driven by strength in the company's data center segment, which rose 57% to $5.8 billion. AMD has seen success with its AMD EPYC processors, which are central processing units (CPUs) that help power cloud computing infrastructure. And investors should expect momentum to continue with the ongoing ramp-up of its Instinct GPUs, which help with AI model training and inference.

The company's gross margins rose by a modest 300 basis points to 53%, and operating income rose 83% to $1.48 billion.

What about the alternatives?

AMD's diversification is a strong selling point relative to its rivals. Unlike Nvidia, which gets over 90% of its sales from its data center segment, AMD's data center segment contributes a relatively modest 57% to its top line. Furthermore, within this segment, the company sells a healthy mix of GPUs, CPUs, and other networking equipment, reducing its reliance on any specific product category or group of customers.

That said, AMD's business model isn't without its challenges. The company's first-quarter gross margin of 53% is significantly lower than Nvidia's 74.9%. And the company's less profitable product mix could cause it to lag behind its rival.

Image source: Getty Images.

AMD also faces macro uncertainties related to the AI industry as a whole. Four years after the launch of OpenAI's ChatGPT, LLMs remain an interesting novelty, but far from the life-changing productivity enhancer many tech executives continue to promise.

And many of the companies pioneering the technology have yet to achieve profitability, with analysts at Deutsche Bank expecting OpenAI alone to expend $140 billion in combined operational losses and capital expenditures by 2029.

While AMD's position as an infrastructure provider shields it from the risks and uncertainties faced by consumer-facing software providers, a slowdown in LLM development could eventually reduce demand for its data center hardware and significantly hurt the company's stock price.

Is AMD stock still a buy?

With a forward price-to-earnings (P/E) multiple of 74 (compared to the Nasdaq-100's average estimate of just 27), AMD stock looks far too expensive to buy right now. While the company's diversification is attractive, this comes at the cost of significantly lower gross margins than other options in the AI infrastructure opportunity, such as Nvidia.

While AI stocks have generated life-changing returns for early investors, the opportunity seems to be getting long in the tooth. And it might make sense for investors to wait on the sidelines for more information to determine whether current data center spending levels are sustainable over the long term. There is a growing possibility that they aren't.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy.