Wall Street May Be Underestimating This Artificial Intelligence (AI) Stock: 2 Reasons You Should Consider Buying While It Remains Underrated

Advanced microsystems (AMD -0.25%) hasn’t gotten much love on Wall Street lately, as evidenced by the company’s stock price dropping 23% since hitting a 52-week high in early March.

The stock was hurt by weaker-than-expected growth in the artificial intelligence (AI) sector in the first quarter of 2024, causing the company to miss market growth expectations. Additionally, the stock was recently downgraded by Morgan Stanley from overweight to neutral, with the investment bank noting that investor expectations for growth in its AI business are quite high.

The bank added that it sees limited upside potential for AMD shares despite a recovery in the company’s core business segments. However, it may be too early to write off this semiconductor stock for a few simple reasons. Let’s take a closer look at two of them.

1. AMD is ideally positioned to capitalize on growing sales of AI-powered computers

According to Mercury Research, AMD’s market share in desktop processors was 23.9% in the first quarter of 2024, an increase of 4.7 percentage points compared to the same period last year. At the same time, its share in notebook processors increased by 3.1 percentage points to 19.3%. Intel controls the rest of that market, but it’s worth noting that AMD has quickly made a dent in Intel’s market share.

The good news is that AMD has set its sights on the AI ​​PC market with its next-generation Ryzen processors that feature dedicated hardware to enable AI applications. Its new Ryzen AI 300 processors deliver 3x the performance of the previous generation in laptops. More importantly, AMD estimates that its processors could power more than 150 AI software experiences by the end of 2024, allowing its CPUs to continue to gain market share.

So there’s a good chance that AMD will be able to maintain the impressive growth momentum it’s currently seeing in the client processor business. The company’s revenue from sales of processors deployed in laptops and desktops increased 85% year over year in the first quarter to $1.4 billion.

AMD is the smallest player in the client processor market. So if it continues to take market share from Intel and capitalize on the opportunity presented by AI-powered PCs, whose shipments are expected to grow at a 44% annual rate over the next four years, its client revenue could continue to improve at a healthy pace.

2. The data center industry has some strong catalysts

AMD’s data center business is benefiting from the proliferation of AI in several ways.

First, the company’s data center graphics processing unit (GPU) business is now gaining traction thanks to massive demand for AI accelerators. This year, AMD expects $4 billion in revenue from data center GPU sales. The company has been raising its data center GPU revenue forecast in recent quarters as more customers line up to buy its chips.

Given that AMD generated a total of $6.5 billion in revenue from its data center segment last year, it’s easy to see that this segment is on track for robust growth in 2024. It’s also worth noting that AMD sold $400 million worth of data center GPUs in Q4 2023, meaning it’s on track to see a much faster quarterly revenue run rate in this business this year.

AMD’s data center GPU revenue could continue to grow at a healthy pace over the long term due to the huge revenue opportunity available in the AI ​​chip market, as well as the company’s moves to make a bigger push into this space by accelerating its product development.

However, there is another AI-related opportunity for AMD in the data center market thanks to AI in the form of server processors. The company’s Epyc server processors are deployed for AI inference applications and are driving strong data center revenue growth along with GPUs. Specifically, AMD’s overall data center revenue grew 80% year over year in the first quarter to $2.3 billion.

Given that AMD has been gaining market share in server processors, investors can expect this tremendous growth to continue going forward. AMD’s server CPU market share increased 5.6 percentage points year over year to 23.6%, while its revenue share increased to 33%. This is, again, at Intel’s expense and bodes well for AMD, as the global server market is expected to grow by more than 12% annually over the next five years.

These catalysts explain why AMD’s growth is expected to improve.

AMD EPS Estimates for the Current Fiscal Year by YCharts

Investors would therefore do well to take advantage of AMD’s pullback, as the stock market could reward its stronger growth with additional upside in the future.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has a position in Advanced Micro Devices and recommends the company. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.