Is AMD Stock a Buy as AI Revenue Soars?

Advanced Micro Devices (NASDAQ: AMD) turned in strong third-quarter results, as its data center revenue nearly doubled. The semiconductor stock has had a strong year, up over 125% going into the report, but has more recently been caught in the AI infrastructure sell-off, and it also took a hit because of rival Intel's (NASDAQ: INTC) weak guidance.

Let's take a closer look at the company's earnings results and prospects to see why I think the stock is a buy.

Strong AI growth ahead

While AMD and Intel are both competitors in the central processing unit (CPU) space, the two companies are quite different. AMD has been taking share from Intel in the server CPU market for years, and has also begun making inroads with its graphics processing units (GPUs). As such, AMD is much more about serving data center clients, while Intel is much more heavily exposed to the weakening PC market, which has come under pressure from rising memory costs.

AMD is seeing pressure in this area as well, projecting a double-digit percentage decline in unit shipments in the PC market next year. Overall, its client and gaming segment revenue fell 8% to $3.7 billion. Client revenue, where its PC business sits, rose 7% to $2.9 billion, while gaming revenue fell 40% to $773 million.

AMD's biggest unit and growth driver, however, is its data center segment. This accounted for 64% of its Q3 revenue, and the company projected it will represent more than 80% of its revenue in 2027.

AMD's data center revenue surged 97% in Q3 to $8.5 billion, powered by strong demand for its Epyc CPUs and MI450 GPUs. The company began shipping its new Venice CPUs in the quarter, which it expects will help it gain even more market share. It continues to see the server CPU market growing to a $220 billion total addressable market by 2030, as demand surges due to the rise of AI agents.

At the same time, the company said AI labs, hyperscalers, and cloud computing providers all increased GPU deployments, helping drive record revenue. It said it delivered its Helios full-rack AI system, which combines its GPUs, CPUs, and networking components, this quarter to lead customers, including Anthropic, Meta Platforms, Microsoft, OpenAI, and Oracle. It said it expects Helios revenue to ramp up in Q4 as OEM (original equipment manufacturer) and ODM (original design manufacturer) partners begin to ship the systems.

AMD projected that its server revenue will double next year, which is faster than it thought just 90 days ago. CEO Lisa Su added that its server CPU business will about double, driven by higher unit shipments and higher core counts, while its data center AI business will "significantly more than double."

The company's embedded segment, meanwhile, saw revenue jump 29% year over year to $1.1 billion. It saw strong growth in the aerospace and defense, automotive, communications, and industrial industries. Its embedded business is expected to grow double digits.

Overall, AMD's Q3 revenue rose by 45% year over year to $13.38 billion. Adjusted gross margin came in at 56%, up 190 basis points from a year ago. Adjusted earnings per share jumped 74% to $2.09. The results topped the consensus of $1.95 in adjusted EPS on $13.09 billion in revenue, as compiled by LSEG.

Looking ahead, AMD guided for Q4 revenue to grow by 66% year over year to $17 billion, plus or minus 3%. That is well above the $16.2 billion analyst consensus. It is targeting an adjusted gross margin of 55%. Meanwhile, for 2027, it is projecting that revenue will surge by 80%.

Image source: The Motley Fool.

Time to buy the stock

AMD is not the cheapest AI semiconductor stock, trading at a forward price-to-earnings (P/E) ratio of 31 times 2027 analyst estimates, but the company has some of the best growth prospects as it rides the 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 generally meaning a stock is undervalued.

One thing to watch: free cash flow fell to $554 million from $1.5 billion a year ago as AMD built inventory and took on debt to fund the ramp, with total debt more than doubling to $7.1 billion in the quarter.

AMD is still in the early innings of its growth curve and has plenty of room to grow, given its much smaller revenue base compared to Nvidia. With Helios just starting to ramp up, now looks like a good time to buy AMD stock.

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, Nvidia, and Oracle. The Motley Fool has a disclosure policy.