Is it too late to buy AMD stock?

The emergence of artificial intelligence (AI) in 2023 has suddenly raised demand for powerful computer processing power. This has been a boon to the semiconductor chip industry Advanced micro devices (NASDAQ:AMD)which produces high-performance chips well suited for artificial intelligence.

This thirst for AI products helped push the company's stock price from a 52-week low of $67.27 last January to a high of $151.05 by December. So, does the surge in AMD stock prices mean it's now too late to buy shares?

As 2024 begins, the stock remains near its 52-week high. But is it possible to go higher than that? Researching the company can help evaluate whether or not AMD is a worthwhile investment.

AMD's AI capabilities

AMD will certainly benefit from the rise of AI. For example, Microsoft AMD is integrating AMD's AI chips into its Windows PC operating system as part of a multi-year partnership. And companies, such as parent Facebook deadis looking to AMD's AI processors as a lower-cost alternative to those offered by industry leaders Nvidia.

AMD CEO Lisa Su noted that demand for the company's MI300 accelerators, its data center AI product, is so strong that it appears to be “the fastest product to reach $1 billion in sales in AMD's history.” To capitalize on this demand, AMD acquired AI software companies Nod.ai and Mipsology in 2023 to bolster its AI offerings. Nod.ai allows customers to automate the implementation and optimization of AI chips. Mipsology helps AI programs run data and make decisions, a process known as inference.

The company's advances in artificial intelligence have helped boost AMD's stock price. But the next test comes when AMD posts its fourth-quarter earnings results later this year.

In the third quarter, the company generated revenue of $5.8 billion, an increase of 4% from the previous year. AMD expects about $6 billion in fourth-quarter sales, up from 2022 sales of $5.6 billion. AMD's fourth-quarter revenue will likely need to exceed these expectations for its stock price to move higher.

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Other Considerations for AMD Stock

Despite the potential upside, over the long term, AMD's business is vulnerable to the cyclical nature of the PC industry. When sales of PCs or gaming consoles decline, for example, demand for AMD chips also declines, hurting its revenues.

This was the case in the first quarter of 2023. AMD's revenue fell 9% year-over-year due to weak sales in the PC market. The first-quarter revenue decline was significant enough to cause the company to post a net loss of $139 million in the quarter, a massive 118% decline from 2022 net income of $786 million.

Another factor to consider is the high valuation of AMD stock. Currently the company P/E ratio (P/E ratio) Of 1,156 over the past 12 months is shockingly high. Compare this with competitor Nvidia's P/E of 72. AMD has to deliver impressive financial results in the future to justify its current valuation.

Furthermore, the average price target for AMD stock among Wall Street analysts is $144.03 at the time of this writing. This is another consideration to take into account when evaluating whether AMD stock is too expensive to warrant an investment right now.

To buy or not to buy AMD stock

AMD's potential business boom from the AI ​​market is a compelling reason to invest, but any short-term revenue increase appears to have been priced into the company's stock already. As a result, it's hard to justify buying AMD stock now, given its current high value.

That could change as AMD delivers on its promise of strong AI sales over time. So, the wise approach is to wait for the price to fall and then the stock will rise.

Another strategy is to buy a small position now in case the company manages to beat Wall Street's expectations in its fourth-quarter results. Then use the technique Average cost in dollars To add to your position when subsequent price declines occur.

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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Robert Izquierdo He has positions at Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has Disclosure policy.

Is it too late to buy AMD stock? Originally published by The Motley Fool