Investors may understandably struggle with the recent volatility of Advanced Micro Devices' (AMD 1.14%) stock. It has fallen by almost one-third since early March, a drop exacerbated by the recent release of its earnings report for the first quarter of 2024.
The sell-off does not negate its potential as an artificial intelligence (AI) chip provider. Nor does it compromise its strength in its other businesses. Hence, the question is whether investors should buy now or wait to add shares of the semiconductor stock.
The state of AMD stock
The first thing investors probably need to do is take a step back. While the recent sell-off was undoubtedly painful for shareholders, investors should remember that it is more modest than the drop in the 2022 bear market, when it lost two-thirds of its value in a little under a year.
Moreover, investors who bought a year ago still have a gain of around 60%. Much of that came from the heightened interest in AI.
Unfortunately for AMD, its rival Nvidia has dominated the AI chip market. To address this competitive threat, it released the AMD Instinct MI300 Series Accelerators. While shipments of these GPU chips increased significantly, AMD remains far behind in this segment.
AMD's mixed results
Still, investors should also remember that it derives revenue from four segments: client, gaming, data center, and embedded. These all combined into lackluster results as revenue grew to $5.5 billion in the first quarter of 2024, up only 2% from the same quarter last year.
Not surprisingly, the data center segment reported 80% growth, boosted by deliveries of the AI-enabled MI300X GPU. Also, the client segment increased its revenue by 85%, driven by higher sales of its recently released Ryzen 8000 series processors.
Unfortunately for the company, gaming revenue dropped 48% yearly on falling semi-custom and Radeon GPU sales. Also, embedded sales fell 46% over the same period as customers worked to manage inventory levels. That led to marginally positive operating income. With additional non-operational income, AMD earned a first-quarter profit of $123 million versus a $139 million loss in the year-ago quarter.
Looking to the future
The profit recovery means earnings are too low for a price-to-earnings (P/E) ratio that would reflect its valuation. Still, the recent pullback has lowered the forward P/E ratio to a more reasonable level. As a result, the forward earnings multiple of 40 is below the yearly average of 44.
Still, how investors will react to that valuation is uncertain since AMD expects the slow growth to continue. For the second quarter of 2024, AMD forecast $5.7 billion in revenue at the midpoint, which would amount to a 6% increase.
In comparison, Nvidia has reported triple-digit revenue gains in recent quarters, making a lukewarm outlook on AMD stock understandable. Nonetheless, given the growing need for AI chips and the cyclicality of the semiconductor industry in general, it is likely too early to give up on AMD stock.
Should I buy AMD stock now?
Given current conditions, investors should consider dollar-cost averaging into this stock. Although AMD is likely a buy long-term, its underperforming segments may cast doubt on its near-term performance.
However, the part of AMD that is tied to the AI chip market shows rapid growth. As AI chips become a larger part of the business, they should boost the company's revenue growth over time.
Moreover, since the chip industry is cyclical, the struggles in the gaming and embedded segments are likely to be temporary. Thus, as each segment improves growth, they should work together to boost AMD stock over time.
