2023 was been an impressive year for the U.S. stock market, with the S&P 500 and the Nasdaq Composite posting returns of 24.5% and 43.4%, respectively. Increasing investor optimism on the back of easing inflation and a stronger-than-expected economy in late 2023 played a major role in this rally. However, the rising adoption of artificial intelligence (AI) across all walks of life has proved to be the most prominent growth driver for the stock market in 2023.
According to Next Move Strategy Consulting, the global AI market is estimated to grow from $207.9 billion in 2023 to nearly $1.8 trillion in 2030. Not surprisingly, many companies are racing to capitalize on this opportunity. Particularly noteworthy is chip giant Advanced Micro Devices (NASDAQ: AMD), which is working to make its presence felt in the ever-expanding AI space.
Here’s why AMD can prove to be the ultimate AI growth stock to buy with $500, assuming this money is not needed for paying bills or contingencies.
Data center market opportunity
AMD’s fourth-quarter 2023 results were a mixed bag. While the company’s revenue and earnings surpassed consensus estimates, weak guidance for the first quarter of 2024 disappointed investors. The stock declined by almost 2.5% in a single day after the company released its fourth-quarter results on Jan. 31, but has recovered almost completely now.
Data center business continues to be a bright spot for AMD, with revenue growing 38% year over year to a record $2.3 billion in the fourth quarter. The company witnessed solid demand for its third and fourth-generation Epyc server CPUs and data center GPUs across cloud, enterprise, and AI customers. The recently launched MI300 Instinct GPUs are also proving to be a close alternative for Nvidia‘s supply constrained H100 chips in cloud, enterprise, and supercomputing environments, thanks to their exceptional performance, high memory bandwidth, and capacity.
AMD has been focused on ramping up the production of its MI300 chips. The company has already created a strong partner ecosystem including major cloud service providers and equipment manufacturers to ensure faster adoption of the MI300 chips. The company has also convinced Microsoft, Meta Platforms, and Oracle to deploy MI300 accelerators for powering cloud-based AI workloads.
AMD’s recently launched ROCm 6 software suite will further improve the programming of the MI300 chips. Subsequently, the company now expects to rake in over $3.5 billion in data center GPU sales (MI300 AI chip sales) in 2024, up from its previous revenue estimate of $2 billion. Many analysts, however, consider this to be conservative guidance and instead expect MI300 sales to be in the range of $5 billion to $8 billion in 2024.
AMD expects the data center AI accelerator market to be worth $400 billion by 2027. Even if the company manages to capture 10% of this market, it will have a significant impact on its financial performance and share prices in the coming years.
Increasing demand for AI-enabled PCs
After witnessing declining volumes for the past two years, Canalys expects PC market shipments to grow 8% year over year in 2024. Besides an upcoming PC refresh cycle and the urgent need to migrate to Windows 11 (since Microsoft will stop support for Windows 10 in October 2025), increasing demand for AI-enabled PCs is also playing a major role in this recovery. IDC expects global AI PC shipments to rise from 60 million in 2024 to 167 million in 2027, which would be nearly 60% of the global PC shipments.
With its AI workload-optimized Ryzen processors, AMD’s client segment seems well positioned to capitalize on these trends. Currently, over 90% of AI-enabled PCs in the market are powered with Ryzen processors. The company is also gearing up for the launch of a next-generation Ryzen AI CPU called Strix, which boasts high performance and energy efficiency.
While the AI PC tailwind may take some time to materialize, it remains a major long-term growth catalyst for AMD.
Improving margins
An increasing shift in business mix toward the high-end data center market coupled with the ramp-up of MI300 chips is expected to boost AMD’s margins in the coming quarters. Additionally, the company expects an improvement in its embedded business segment in the second half of 2024 to emerge as a tailwind for margin expansion.
Valuation
AMD is currently trading at 12.5 times trailing-12-month sales, significantly higher than its five-year average valuation of 8.2x. However, the valuation pales in comparison to Nvidia’s price-to-sales ratio of almost 40x — which is AMD’s major competitor in the AI space.
Hence, considering AMD’s focus on capturing a share of the rapidly expanding AI market and its improving margin profile, it makes sense for retail investors to pick up at least a small position in this stock — even at the current elevated price levels.
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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. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. 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.
The Ultimate Artificial Intelligence (AI) Growth Stock to Buy With $500 was originally published by The Motley Fool
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