Chipmaker Advanced Micro Devices (AMD +3.36%) doesn't have the market share or Wall Street buzz that archrival Nvidia does in the artificial intelligence (AI) race. But rest assured, second place isn't necessarily a bad place to be.
The company has an ocean of opportunity ahead of it, with a rapidly growing AI market that will give AMD every opportunity to grab a piece. Also, market volatility has returned, and shares are down nearly 20% over the past month.
I'll explain why this is a stellar buying opportunity for long-term investors.
A viable alternative to the market leader
There's no argument that Nvidia is the king of the AI chip jungle right now. The company's market share is estimated to be as high as 90% thanks to a strong combination of its H100 AI chips and CUDA software that enables developers to harness GPU computing power for general workloads such as crunching the massive amounts of data involved with running AI functions.
One might think of AMD's place in this race this way: At such a disadvantage today, it has no place to go but up? To answer that question, the company has created what it believes to be a viable alternative to Nvidia's offering.
Its MI300 series is more powerful than Nvidia's H100 series, and AMD offers ROCm software, an open-source alternative to CUDA that gives developers more freedom due to the open nature of the code.
NASDAQ: AMD
Key Data Points
Sure, some companies might stick with Nvidia, which recently unveiled a more powerful successor to the H100 series. But many AI users could value a similarly-performing AI chip with a more flexible software package.
AMD is already doing business with Meta and Microsoft, which are buying the MI300 chips as an Nvidia alternative. Even if Nvidia remains the runaway leader, that's fine. AMD can do very well as a notable competitor.
CEO Lisa Su believes the AI chip market will balloon to over $400 billion by 2027. Considering that her company's data center revenue was just $6.5 billion in 2023, AMD could grow a lot, even if it captures just a small slice of such a large pie.
The numbers look good, too
Analysts seem optimistic about AMD's future while keeping expectations realistic. Nvidia accelerated to triple-digit growth on AI tailwinds, and AMD doesn't need to come anywhere close to that. Estimates call for annual earnings growth averaging a "modest" but impressive 43% over the next three to five years.
Again, this is realistic because of how big the AI chip market will become over that time frame. A small chunk of the market can double or triple AMD's current data center business and lift growth for the broader company.
AMD PE ratio (forward) data by YCharts; PE = price to earnings; EPS = earnings per share.
The stock once traded at 56 times its estimated 2024 earnings, but the recent slide has brought shares down to 43 times earnings. That's a bargain for a company growing earnings at 43%, a price/earnings-to-growth (PEG) ratio of just 1.
Volatility ahead?
Investors should keep their feet on the ground and their expectations in check. The market's pullback is no fluke. Interest rates could remain higher for longer, which acts as gravity for stock valuations. Meanwhile, conflict in the Middle East creates added market turmoil.
Just because a stock is cheap today doesn't mean it can't get cheaper. Investors should consider a dollar-cost averaging strategy to buy shares slowly and prevent themselves from going all-in too soon. That way, you'll slowly build a position and have extra cash if the market pushes AMD to even more attractive levels.
