Is AMD Stock a Buy on the Dip as AI Revenue Surges?

Advanced Micro Devices (NASDAQ: AMD) shares sank despite the semiconductor company reporting a surge in AI data center revenue in the second quarter and projecting that the segment will see revenue more than double in 2027. While the stock is well off its high, it is still up around 125% on the year.

Let's dig into the company's earnings results and prospects to see why I think this dip could be a good buying opportunity.

Helios to be a major growth driver

While AMD saw some benefits from the initial phase of AI training, it was largely just getting scraps as hyperscalers (owners of large data centers) looked to keep rival Nvidia honest. However, with the rise of inference and agentic AI, AMD is set to become a major AI player.

The company has long been a leader in data center central processing units (CPUs), where it has been taking share from Intel, and this market is now set to explode. Inference and agentic AI require the use of many more CPUs compared to training, with the GPU-to-CPU ratio expected to go from 8-to-1 for training to 4-to-1 for inference, and 1-to-1 for agentic AI. It projects that this will be a $220 billion market opportunity in the next few years.

In Q2, AMD saw its data center CPU revenue surge 70%, and it now expects server CPUs to grow by more than 80% year over year in the second half of this year and by more than 70% in 2027.

At the same time, the company's graphics processing units (GPUs) have gained traction in the inference market. Inference is more about memory access and latency, and its chiplet design can be packaged with more high bandwidth memory (HBM) to help reduce latency.

Importantly, AMD will start delivering its first-ever full-rack AI system, Helios, this quarter, combining its GPUs, CPUs, and networking components, with shipments expected to start to ramp up in Q4. This should be a major driver for the company, as it has major inference deals in place with hyperscalers, including OpenAI, Meta Platforms, Anthropic, and Microsoft.

Overall, AMD's Q2 revenue climbed by 50% year over year to $11.54 billion, which was an acceleration from the 38% growth it saw in Q1. Adjusted gross margin came in at 56%, up 1,300 basis points from a year ago, helped by a greater percentage of revenue coming from its data center products. Adjusted earnings per share surged 246% to $1.66. The results surpassed the consensus of $1.62 in adjusted EPS on $11.28 billion in revenue.

Data center revenue skyrocketed 107% year over year in the quarter to $6.7 billion. Client and gaming segment revenue, meanwhile, rose by 6% to $3.8 billion. Within the segment, client revenue jumped by 23% to $3.1 billion, while gaming revenue plunged 31% to $779 million due to lower semi-custom sales. AMD's smaller embedded segment, meanwhile, saw revenue climb by 19% to $977 million.

Looking ahead, AMD guided for Q3 revenue to grow by 41% year over year to $13 billion, plus or minus $300 million. It is targeting an adjusted gross margin of 56%.

Image source: The Motley Fool.

Time to buy the dip

While AMD's stock is not cheap on the surface, trading at a forward price-to-earnings (P/E) ratio of 35 times 2027 analyst estimates, the company is riding two powerful trends in inference and agentic AI. Meanwhile, it has a forward price/earnings-to-growth (PEG) ratio of only 0.3, with a ratio below 1 typically meaning a stock is undervalued.

AMD is still in the early innings of its growth curve, and with Helios just around the corner, this is a company with massive growth potential ahead. As such, I'd be a buyer on this price dip.

Geoffrey Seiler has positions in Advanced Micro Devices and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.