Is AMD Stock a Buy Now? | The Motley Fool

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The stock surged impressively in 2023, but its financial performance has not been up to the mark.

Advanced Micro Devices (AMD 1.91%) investors are sitting on nice gains of 65% in 2023. The chipmaker has benefited from a combination of the broader surge in semiconductor stocks and a turnaround in its fortunes following a difficult first half of the year.

AMD’s revenue and earnings have taken a hit of late on account of steep declines in personal computer (PC) sales, which have hamstrung the demand for its central processing units (CPUs). Additionally, the company is witnessing weakness in the enterprise data center segment, where an ongoing inventory correction has led to a drop in sales. But AMD’s guidance for the third quarter of 2023 indicates that the worst may be over.

However, AMD stock has pulled back almost 17% from the 52-week high that it hit in mid-June. This pullback may seem a tad surprising given that AMD delivered solid second-quarter results in August, and its guidance points toward better times ahead. Does this mean savvy investors should see this semiconductor stock’s pullback as a buying opportunity? Let’s find out.

AMD’s revenue dropped 14% year over year in the first six months of 2023 to $10.7 billion, which doesn’t justify the stock’s rich price-to-sales (P/S) ratio of 7.7. It is worth noting that AMD was trading at a cheaper 4.3 times sales at the end of 2022, a year during which it reported a 44% jump in revenue to $23.6 billion and a 25% increase in earnings to $3.50 per share.

In simpler words, AMD stock became expensive while its growth tailed off.

So AMD stock isn’t a value play even though it has pulled back in the past few months, especially considering that its top line is expected to slide 3% in 2023 to $22.8 billion. Analysts are also anticipating the company’s earnings to drop to $2.76 per share this year.

But if AMD stock continues to slide and is available at a cheaper valuation, investors should consider grabbing the opportunity with both hands. Let’s look at the reasons why.

AMD is anticipating $5.7 billion in revenue in the current quarter, which would be a small improvement over the $5.56 billion top line it clocked in the same period last year. Analysts are expecting the company to step on the gas in the final quarter of the year, delivering a 14% jump in revenue to $6.4 billion and a 27% spike in earnings to $0.88 per share.

There are a couple of reasons why AMD could live up to analysts’ expectations and start growing at a nice clip from the next quarter.

The first reason to be optimistic about an AMD turnaround is the improving state of the PC market. Market research firm Canalys points out that PC shipments were down 11.5% year over year in the second quarter of 2023, which was a big improvement from the 30%-plus declines seen in the previous two quarters.

What’s more, PC shipments were up nearly 12% sequentially in Q2, which is another sign of an improvement in the market. The global PC market is expected to return to growth in 2024, with shipments expected to increase by 3.7% as per IDC. So the biggest factor that weighed AMD down in 2023 — its client CPU revenue has dropped a whopping 59% in the first six months of the year to $1.7 billion — is likely to go away soon.

The second reason why AMD is set to step on the gas is because of its new artificial intelligence (AI)-focused data center chips, which are reportedly seeing solid customer interest. AMD CEO Lisa Su recently told technology news website The Verge in an interview that the company is targeting the AI inference market with its upcoming MI300 processor.

This seems like a smart move from AMD, as inferencing is expected to account for 85% of the AI chip market. AMD’s rival Nvidia is currently the leader in the market for AI training chips, which reportedly account for 10% to 20% of the overall AI chip market. So AMD could start taking advantage of the lucrative market for AI chips very soon. This could give its growth a big shot in the arm as it sees a $150 billion revenue opportunity in this space through 2027.

All of these factors indicate that AMD could indeed return to growth soon enough. That’s why investors would do well to keep this tech stock on their radar and start accumulating it if it drops further and is available at a more attractive valuation.

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