Advanced Micro Devices (AMD) Recently Crashed Out of the $1 Trillion Club. Should You Buy the Dip?

The U.S. is currently home to 12 publicly listed companies worth $1 trillion or more. Semiconductor giant Advanced Micro Devices (NASDAQ: AMD) joined that exclusive club in September, but its stock has since declined by 25% from its peak, so the company is now valued at just $797 billion (as of the market close on Nov. 4).

AMD has become one of Nvidia's (NASDAQ: NVDA) top competitors in the market for data center graphics processing units (GPUs), which are the primary chips used in artificial intelligence (AI) workloads. Concerns about the sustainability of the AI infrastructure spending boom sparked the downside in AMD stock, but the company's operating results for the third quarter (ended Sept. 30) suggest sales won't be slowing down anytime soon.

Is this the ultimate buying opportunity for investors?

Image source: The Motley Fool.

Demand is soaring for AMD's data center chips

AMD launched its first dedicated AI data center GPU in 2023, and it was called the MI300X. It lagged Nvidia's original H100 GPU in terms of performance, but major tech companies like Microsoft, Meta Platforms, and Oracle thought it was a good alternative in the face of industrywide supply shortages.

AMD has since launched several new generations of its flagship GPU, and it has closed the gap to the competition. The company says its latest MI450 Series chips can be 15% more powerful and 30% more energy efficient than anything else on the market when installed in its fully integrated Helios data center rack. Helios includes specialized central processing units (CPUs), high-bandwidth memory, and networking components to extract the most processing power from every GPU.

AMD started shipping MI455X GPUs and Helios racks to a star-studded list of customers during the third quarter, which included Anthropic, OpenAI, Microsoft, Meta, and Oracle. OpenAI and Meta each plan to deploy 6 gigawatts' worth of computing capacity over the next few years using AMD's chips, and while they are starting with the MI450 Series, they will be big buyers of every future generation that follows.

In fact, AMD is already engaging customers regarding the MI500 Series and MI600 Series, which will deliver further leaps in performance.

AMD's third-quarter data center revenue nearly doubled

AMD generated $13.4 billion in revenue across its three core business segments during the third quarter, which was a 45% increase from the year-ago period. But the data center segment alone accounted for $8.5 billion of that total, and it grew by a whopping 97%.

AMD chief executive Lisa Su believes data center sales will more than double in 2027, and will account for 80% of the company's total revenue. According to a series of comments last month, Su plans to substantially increase GPU supply next year to facilitate her strong growth forecast, suggesting the company might be gearing up to take market share from its competitors.

On the whole, Su's commentary alleviates recent fears that data center spending is poised for a slowdown, at least for now.

AMD stock isn't cheap, despite its recent sell-off

AMD delivered adjusted (non-GAAP) earnings of $6.65 per share over the last four quarters, placing its stock at a price-to-earnings (P/E) ratio of 73.5. That means it's almost three-times as expensive as Nvidia, which has a P/E ratio of 25.3.

Even if we value AMD stock based on Wall Street's average 2027 earnings estimate of $16.27 per share (provided by Yahoo! Finance), its stock has a forward P/E of 30. Therefore, even if the stock does absolutely nothing for the next 12 months, it will still be more expensive than Nvidia stock is today.

Therefore, AMD is basically priced for perfection heading into next year, leaving no room for error. If the company doesn't grow its data center business as fast as Su forecasted, its stock could suffer an even further decline.

As a result, it might not be wise to buy AMD stock at the current price. A return to the exclusive $1 trillion club might be possible in the future, but I think its valuation will be a barrier in the near term.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.