Advanced Micro Devices(NASDAQ: AMD) supplies some of the best chips in the world for computers, cars, game consoles, and data centers. The company's data center business is a key focus for investors right now, as demand soars for its graphics processing units (GPUs), which are designed for artificial intelligence (AI) development.
AMD, as its known, is still chasing Nvidia in the AI data center market, but the company's latest GPUs could help close the gap. Plus, AMD is already a leading supplier of AI chips for personal computers, which could be the next big growth segment.
The stock is down 47% from its record high last year, primarily due to sluggish results from its gaming business. But AI could be the biggest opportunity in the company's history, so should investors swoop in and buy the dip?
Image source: Getty Images.
AMD is racing to the front of the AI industry
AMD's MI300X data center GPU is the company's top AI chip, and it won over many of Nvidia's top customers, including Microsoft, Meta Platforms, and Oracle. But the company is now gearing up to start shipping its MI350 series, which is based on a new architecture called CDNA (Compute DNA) 4.
CDNA 4 GPUs like the upcoming MI355X can deliver up to 35 times more performance than the MI300X, so they are a legitimate competitive threat to Nvidia's Blackwell chips, which recently started shipping at scale. MI355X production will ramp up into the middle of this year, and Oracle has already ordered a whopping 30,000 of them in a multi-billion-dollar deal.
But AMD isn't standing still. It's already working on its new MI400 series which will launch in 2026. These chips will likely deliver a similar level of performance to Nvidia's recently announced Blackwell Ultra GPUs. Simply put, AMD is closing the performance gap with Nvidia with every new generation of its GPUs.
Longer term, AMD is preparing for AI workloads to shift from data centers to personal computers (PCs), which means people will be able to use powerful AI software without an internet connection, creating a faster and more convenient experience. The company launched a series of accelerated processing units (APUs) under its Ryzen AI banner, which feature a GPU, a central processing unit (CPU), and a neural processing unit (NPU) packaged into one chip.
Millions of computers have already shipped with AMD's Ryzen AI chips since 2023, from top manufacturers like Microsoft, HP, and Dell. However, the company just launched its most powerful variant so far, Ryzen AI Max, which set the benchmark for AI processing and battery life. As more AI workloads shift onto PCs and devices, this part of AMD's business could become even more important than the data center.
AMD's AI revenue continues to soar
AMD generated $7.4 billion in total revenue during the first quarter of 2025. It represented a 36% increase from the year-ago period, and it was comfortably above Wall Street's forecast of $7.1 billion. But the real stories are beneath the surface of the headline number.
The chipmaker generated $3.7 billion in data center revenue during Q1, which was up 57% year over year thanks partly to strong AI GPU sales. Plus, the company's client segment -- which is where it accounts for Ryzen AI PC chip sales -- saw revenue soar by 68% to $2.3 billion. That means the two segments of AMD's business that rely the most on AI chip sales now account for over 81% of the company's total revenue, which bodes well for its future growth prospects.
But here's the bad news: AMD's other two segments continue to struggle. Its gaming business generated $647 million in revenue, which was down 30% year over year, but it did grow sequentially (compared to the fourth quarter of 2024) thanks to the launch of the new Radeon 9070 GPU. Demand is outstripping supply for the new chip, but AMD is working to replenish inventory, so there could be further sequential growth from the gaming segment during the current second quarter of 2025.
AMD's embedded business delivered $823 million in sales, which represented a decline of 3% from a year ago. But the company expects improving demand from key markets like aerospace, which could fuel a return to growth in the second half of 2025.
Image source: Advanced Micro Devices.
AMD stock is trading at an attractive valuation
AMD has generated $3.66 in non-GAAP (generally accepted accounting principles) earnings per share (EPS) over the last four quarters, placing its stock at a price-to-earnings (P/E) ratio of 29.5. That's a 28% discount to Nvidia stock, which trades at a P/E ratio of 41.1. So AMD looks like a good value compared to its biggest competitor.
Moreover, Wall Street's consensus estimate (provided by Yahoo! Finance) suggests that AMD's EPS could soar to $5.74 in 2026, which places its stock at a forward P/E ratio of 18.8. That means the stock would have to soar by 57% by the end of next year just to maintain its current P/E ratio of 29.5, and by a whopping 118% if it were to match Nvidia's current P/E of 41.1.
Microsoft, Meta Platforms, Amazon, and Alphabet plan to spend around $328 billion (combined) this year on AI data center infrastructure and chips, based on their latest forecasts. That doesn't include spending from other AI giants like Oracle, OpenAI, or Tesla. But this is just the beginning. Nvidia CEO Jensen Huang thinks annual AI data center spending will continue to grow, eventually hitting $1 trillion per year by 2028.
AMD could find itself with a growing piece of that enormous pie as its MI350 shipments ramp up later this year, and then again when its MI400 chips hit the market. Therefore, the 47% drop in its stock has created a great opportunity for investors to buy into this exciting growth story at an attractive valuation.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, HP, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
