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Written by Geoffrey Seiler for The Motley Fool->
AMD is at the intersection of two powerful trends: Inference and agentic AI.
The company is facing intense competition, and its forward P/E multiple is high.
Continuing my "bull versus bear" series of articles on popular stocks, I turn my attention to Advanced Micro Devices (NASDAQ: AMD). The stock has been on a roll, up more than 200% over the past year. However, can its momentum continue, or does the stock need to take a breather?
Let's dive into the bullish and bearish arguments on this artificial intelligence (AI) stock to find out.
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After largely being left out of the initial training phase of the AI boom, AMD now finds itself well-positioned to be a huge winner as the market shifts toward inference and agentic AI.
The chiplet design that AMD uses for its graphics processing units (GPUs) packs in more memory, making them well-suited for inference, and its upcoming MI450 design really raises the bar. Meanwhile, the company has greatly improved its ROCm software platform, and with most newer AI code being written on open-source standards, it's in a much better position with inference than it was with training.
It also signed two large GPU partnerships with OpenAI and Meta Platforms, which will use its GPUs for inference. These are sizable deals that should see AMD generate strong revenue in the coming year. It will also see both companies integrate its ROCm platform into their ecosystems, which should set the stage for the company to become a bigger inference player.
At the same time, AMD has another huge opportunity in front of it with high-performance central processing units (CPUs). The company is the leader in this space, and demand for data center CPUs looks ready to explode due to the rise of inference and agentic AI. Rival Intel recently said that the ratio of CPUs to GPUs goes from 1:8 for training to 1:4 for inference and down to 1:1 for agentic AI.
That shift is leading to a shortage of high-performance CPUs, which is allowing AMD to raise prices and boost its gross margins on these chips. Meanwhile, the company is already in the process of introducing a new high-core CPU architecture, called Venice, designed specifically for agentic AI. Core count is important because each core serves as sort of like an independent workspace, allowing the CPU to manage multiple AI agents simultaneously.
Right now, AMD is at the intersection of two power trends: Inference and agentic AI. Meanwhile, following its acquisition of ZT System, the company can also offer complete server rack solutions for specific AI tasks like inference and agentic AI, adding another potential growth driver.
AMD has always been second fiddle to Nvidia in the GPU space, and that is unlikely to change. While it has an opportunity in inference, Nvidia has upped its game following its "acquisition" of Groq and integrating its language processing units (LPUs) designed specifically for inference into its CUDA ecosystem.
At the same time, there is a growing trend among hyperscalers (owners of massive data centers) of developing their own custom AI accelerators. Alphabet and Amazon have already had success in this area. Between the rise of custom AI chips and Nvidia's offerings, AMD could be squeezed in the middle. Meanwhile, AMD paid a hefty price to secure its OpenAI and Meta deals, giving each warrants worth up to 10% of the company if certain triggers are met.
As for CPUs, competition in the space is also on the rise. Arm Holdings recently announced that it was setting aside its intellectual property (IP) model to make physical chips for the first time, with a focus on the data center CPU market. Meanwhile, Nvidia has introduced its own data center CPU with Vera, while Amazon and Alphabet also have their own custom CPUs. Intel also remains a rival in this space.
Since it's trading at a forward price-to-earnings (P/E) of 49, it also looks like a lot of potential upside is already priced into the stock.
While it does face competition, AMD looks poised to see explosive growth in the coming years from its GPU and CPU opportunities, and the ability to package both together is a clear advantage. While the stock has a high forward P/E, it has a forward price/earnings-to-growth (PEG) ratio of only 0.3 (with under 1 times being considered undervalued).
That makes AMD a buy in my view, even after its already strong run over the past year.
You can find past "bull vs. bear" articles on Apple, Meta Platforms, Palantir Technologies, Micron Technology, Tesla, and Nvidia by following the links.
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Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Meta Platforms, Micron Technology, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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