Investors may understandably struggle with the economy's recent volatility Advanced micro Devices' (NASDAQ: AMD) stock. Since early March, the economy has fallen by almost a third, a decline exacerbated by the recent release of the first quarter 2024 earnings report.
The sellout doesn't diminish its potential as a artificial intelligence (AI) chip supplier. Nor does it compromise his strength in his other activities. So the question is whether investors should buy now or wait to add shares semiconductor stock.
The state of AMD stock
The first thing investors should probably 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 2022 bear market decline, which lost two-thirds of its value in just under a year.
Plus, investors who bought a year ago are still up about 60%. A lot of that came from the increased interest in AI.
Unfortunately for AMD, its rival Nvidia has dominated the AI chip market. To counter this competitive threat, it has released the AMD Instinct MI300 Series Accelerators. Although the supply of these GPU chips has increased significantly, AMD remains far behind in this segment.
AMD's mixed results
Yet investors should also remember that it generates revenue from four segments: client, gaming, data center and embedded. All of this resulted in lackluster results, as revenue grew to $5.5 billion in the first quarter of 2024, just 2% more than the same quarter last year.
Unsurprisingly, the data center segment reported 80% growth, boosted by the delivery of the AI-enabled MI300X GPU. The customer segment also increased its revenue by 85%, driven by higher sales of the recently released Ryzen 8000 series processors.
Unfortunately for the company, gaming revenues fell 48% annually due to declining sales of semi-custom and Radeon GPUs. Additionally, embedded systems sales fell 46% during the same period as customers worked to manage inventory levels. This led to a marginally positive operating result. With additional non-operating revenue, AMD posted a profit of $123 million in the first quarter, compared to a loss of $139 million in the same quarter last year.
Looking to the future
The earnings 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 price-earnings ratio to a more reasonable level. As a result, the forward earnings multiple of 40 is below the annual average of 44.
Still, it's uncertain how investors will react to that valuation, as AMD expects slow growth to continue. For the second quarter of 2024, AMD expects revenue of $5.7 billion at the midpoint, which represents an increase of 6%.
By comparison, Nvidia has reported triple-digit revenue increases in recent quarters, making the tepid outlook for AMD stock understandable. Still, given the growing need for AI chips and the cyclicality of the semiconductor industry in general, it's probably too early to give up on AMD stock.
Should I Buy AMD Stock Now?
Given current conditions, investors should consider dollar-cost averaging for this stock. While AMD will likely make a long-term buy, the underperforming segments could cast doubt on its near-term performance.
However, the part of AMD tied to the AI chip market is showing rapid growth. As AI chips become a bigger part of the business, they should drive the company's revenue growth over time.
Furthermore, because the chip industry is cyclical, the problems in the gaming and embedded segments are likely to be temporary. So, as each segment improves growth, they should work together to boost AMD stock over time.
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Will Healy has positions in Advanced Micro Devices. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has one disclosure policy.
Is AMD Stock a Buy Now? was originally published by The Motley Fool
