As we wrap up 2024, it’s interesting to reflect on the constants in my life over the past decade. One of them is Nvidia’s (NVDA) stock price consistently going up. Another one is AMD’s (AMD) stock price usually following suit. Unfortunately, 2024 was an exception for AMD, as its stock finished the year down 17%. In contrast, Nvidia advanced 171%, Broadcom (AVGO) rose 107%, and the Nasdaq Composite (^IXIC) added 28%.
A Closer Look at AMD
AMD’s stock price performance is surprising given its impressive earnings growth, top-notch innovation, and execution on the chip front. The company’s chair and CEO, Lisa Su, reminded me of this in a September chat. Moreover, Intel (INTC) has struggled, creating opportunities for AMD to gain ground.
However, there are three problems that I believe are holding back AMD’s stock:
The Nvidia Effect
Nvidia’s product pipeline, led by the new Blackwell chip now hitting markets, is seen as being one year ahead of AMD in terms of artificial intelligence performance. This perception is affecting market share gain opportunities for AMD.
The Cloud Player Effect
Major cloud players are increasingly opting for custom chips from Marvell (MRVL) and Broadcom. For example, Amazon (AMZN) has indicated its preference for custom chips from its Trainium line and Marvell or Nvidia products. Similarly, Google (GOOG) prefers internal chips and those from Broadcom and Nvidia.
Weak PC Sales Outlook
The outlook for the PC market in 2025 remains subdued at best, putting risk to AMD’s estimates. Some on the Street have whispered that the first half of 2025 could bring a PC market correction.
AMD did little to help sentiment around its stock by guiding fourth-quarter earnings per share to be 8% below consensus when it reported earnings in late October.
A Challenge and Opportunity for AMD
In calendar year 2025, AMD will need to take share in the enterprise PC market where Intel is dominant, while fending off threats from ARM-based (Qualcomm) rivals. This will be a significant challenge for the company.
Fundamentals Paint a Different Picture
Despite the challenges mentioned above, the fundamentals of AMD paint a different picture. The company’s new AI chip, dubbed the MI300, notched $1.5 billion in sales in the third quarter of 2024. It represented the fastest product to $1 billion in sales in a quarter ever for AMD.
AMD guided to $5 billion in MI300 sales for 2024, up from $4.5 billion. The Street thinks this number could reach about $9.5 billion in 2025. Momentum on the AI chip front has AMD on pace for at least 50% earnings growth this year, based on analyst estimates.
Has AMD Become Too Cheap?
The stock trades on a trailing price-to-earnings growth (PEG) ratio of 0.31 times, below 1 times for Nvidia and oddly below the 0.55 times afforded struggling Intel. AMD’s forward price-to-earnings (PE) multiple of 24 times is also well under Nvidia’s.
The stock is off by almost 50% from its 52-week high while competitors hover around record highs.
Investor Sentiment
"I believe AMD is being underestimated for its AI potential," says Wedbush Securities analyst Daniel Ives. "AMD has a very strong strategy in place to continue to gain share in the market, and we expect that to pay off in 2025."
Evercore ISI semiconductor analyst Mark Lipacis also remains bullish on AMD. "We like AMD’s strategy, which we view as similar to its (successful) CPU strategy vs. Intel and focused on optimizing its solution for high-volume AI workloads," he said.
Conclusion
In conclusion, while there are challenges facing AMD in 2025, the fundamentals of the company paint a different picture. With momentum on the AI chip front and a strong strategy in place, I believe that AMD has become too cheap to ignore.
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About the Author
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow him on Twitter @BrianSozzi or connect with him on LinkedIn. If you have any tips or suggestions, email brian.sozzi@yahoofinance.com.
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(This story does not contain any personal opinions or financial advice. It is for informational purposes only.)