AMD: A Strong Contender in the AI Boom, But Is It a Buy?

Unless you've been living under a rock, you've heard about the rise of machine learning and artificial intelligence (ML/AI) as transformative computing tools.

It took off with OpenAI's release of ChatGPT in 2022. In just two and a half years, we've seen an explosion of powerful general-purpose chatbots from Meta, Google, Anthropic, and others, alongside AI-driven applications in industries like IT service management (e.g., ServiceNow).

There’s no sign of this slowing down. I see ML/AI as the biggest technological shift since the smartphone revolution began with the iPhone in 2007. AI has the potential to disrupt industries ranging from autonomous vehicles to medical research, software development, and beyond.

Training and running these large AI models require massive computing power—especially GPUs. This demand has fueled NVIDIA’s transformation from a niche graphics card maker into a $3 trillion giant.

NVIDIA is a Green Screen stock, but I’ve never reviewed it due to its extreme overvaluation. However, what if I told you there’s another company poised to benefit from AI hardware demand—one with a more reasonable valuation and a history of taking on industry giants? That company is today’s Green Screen stock review: Advanced Micro Devices (AMD).

AMD's Business at a Glance

AMD designs CPUs (Ryzen, EPYC), GPUs (Radeon), and field-programmable gate arrays (FPGAs) from its Xilinx acquisition. Revenue breakdown:

Data Center: 48% of revenue, 27% operating margin, ~100% growth. Includes CPUs for cloud computing and AI-focused CPUs/GPUs.

Client: 26% of revenue, 9.5% operating margin, 49% growth. PC and laptop components sold to consumers and businesses.

Gaming: 11% of revenue, 12% operating margin, declining in 2024. Covers GPUs and hardware for PlayStation and Xbox.

Embedded: 15% of revenue, 40% operating margin. FPGAs for AI, telecommunications, and automotive applications.

AMD is a "fabless" semiconductor company, outsourcing chip fabrication to Taiwan Semiconductor (TSMC), which reduces capital expenditures and ensures cutting-edge manufacturing.

Growth and Revenue Stability

AI-driven demand is the key growth catalyst. Data Center sales are booming, with AI GPU revenue reaching $5 billion from near zero in two years. Management estimates the AI accelerator market will hit $500 billion annually by 2028, supporting forecasts of 20-25% annual revenue growth.

AMD is actively expanding, acquiring Silo AI and ZT Systems in 2024 to enhance its AI capabilities. Expect further acquisitions to strengthen its hardware and software stack.

However, AMD lacks recurring revenue. As a hardware company, its sales are cyclical, evidenced by gaming revenue falling over 50% in 2024 due to console market saturation. Despite cycles, long-term demand for compute power has trended steadily upward since the 1980s, and I expect that to continue.

Moat

AMD has a "narrow" moat.

It is one of only two companies licensed to produce x86 CPUs, the dominant platform for data centers and client computing. This provides an intangible asset advantage over competitors like Qualcomm and Samsung.

AMD is also one of only two major players in GPUs (alongside NVIDIA), a critical component in AI workloads. Its Xilinx FPGA business benefits from a switching cost moat, as engineers trained on its design tools are reluctant to switch.

However, threats exist. ARM is gaining traction, with Apple shifting Macs to custom ARM chips. Cloud giants like Google and Meta are developing in-house AI chips, potentially reducing AMD’s market share.

Management and Financial Health

CEO Lisa Su has led AMD since 2014, overseeing a nearly 4,000% stock gain. Her strategic moves, including partnering with TSMC and outmaneuvering Intel, have solidified AMD’s position. At 55, she likely has many years left at the helm.

Financially, AMD is strong. Cash exceeds debt by over 3x, and debt-to-equity is just 3%. Free cash flow margins have been volatile due to AI investments but should stabilize around 20% long-term. No major concerns here.

Risks

AMD carries "medium-high" risk.

First, semiconductor markets are cyclical. AI demand is strong now, but a slowdown could leave AMD overvalued.

Second, competition is fierce. NVIDIA dominates AI workloads and has a superior software ecosystem. ARM-based alternatives and tech giants' in-house chip designs also pose threats.

These factors could limit AMD’s upside, making it a riskier investment than some might prefer.

Conclusion

I'm on the fence about adding AMD to the Watch List. It has strong revenue growth potential, a narrow moat, and top-tier leadership, but it also faces credible risks and lacks recurring revenue.

That said, I believe AI-driven compute demand may be even larger than expected. In massive markets, even a small share can translate to significant gains.

Modeling 20% annual growth and 20% free cash flow margins with an 11.5% discount rate, I get a fair value of $105/share. With AMD trading slightly above that, I'll add it to the Watch List and wait for a better entry point.