Is AMD Stock Poised for a Recovery in 2025?

Advanced Micro Devices (AMD), commonly referred to as AMD, has experienced a notable decline as a tech stock this past year. In 2024, the stock fell by 18%, despite its opportunities for growth as a leading manufacturer of artificial intelligence (AI) chips.

However, in the span of the last five years, AMD has seen an impressive gain of approximately 140%. It has consistently outperformed the market. So, the question arises: will 2025 be a year of recovery for AMD, or are there challenges still looming ahead?

AMD's Growth Performance

In the AI industry, growth is paramount. Unfortunately, this is an area where AMD has been lacking. Although it engages in the production of AI chips, it has been trailing behind its major competitor, Nvidia. While AMD's chips are often priced more attractively, they must demonstrate that there is strong demand for them.

It is clear why Nvidia has been a popular investment choice while AMD has stumbled. A comparison of the growth rates reveals the stark contrast in their stock valuations. Although AMD's growth rate has seen some recent upticks, it still can't match Nvidia's remarkable performance.

For AMD's stock to recover, it must prove that its AI chips are competitive with those from Nvidia, which requires a significant improvement in its growth rate.

Is AMD a Good Value Right Now?

You might think that AMD’s recent drop in stock price makes it a more appealing option compared to Nvidia, which continues to soar. However, even with AMD's underperformance, it hasn't translated into a lower price for investors. Despite continued declines, AMD remains a less attractive value compared to Nvidia.

Nvidia's exceptional growth and high margins mean that, in terms of earnings multiples, it is still perceived as the better buy. Although AMD's price-to-earnings ratio has been improving, it has a long way to go before reaching Nvidia's significantly lower multiple.

Should You Invest in AMD Today?

Both AMD and Nvidia are seen as promising long-term investments in the AI sector. Nonetheless, AMD still has to demonstrate to investors that its AI chips can hold their own against Nvidia's offerings. If AMD can achieve that, it could see an acceleration in growth and improved earnings, bridging the gaps in valuation metrics.

Investors might view AMD as a more contrarian choice presently. For those willing to take on some risk with a business that shows potential for growth, investing now could yield significant returns, provided the company can deliver stronger earnings in the upcoming quarters. On the other hand, Nvidia is a safer, more stable investment, but its high valuation may limit its potential for future growth.

If you prefer a cautious approach to investing, it might be wise to hold off on purchasing AMD shares for the time being. Observing the company's performance throughout the year will be important. Should AMD's AI chips demonstrate an accelerating growth trend, this may indicate that the stock is gearing up for an upswing and could indicate longer-term potential. Conversely, if earnings remain disappointing, it could lead to further declines.

David Jagielski has no position in any of the mentioned stocks. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia.

AMD, Stock, Growth