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The AMD (Nasdaq: AMD) stock price has crawled back in the past few weeks, rising from the August low of $121.80 to the current $170. It has jumped by over 208% from its lowest point in 2020.

AMD shares have jumped by over 26% this year, underperforming the VanEck Semiconductor ETF (SMH) and the iShares Semiconductor ETF (SOXX) have risen by 50% and 28%, respectively.

Most importantly, AMD’s stock has underperformed Nvidia, which has jumped by over 160% this year, pushing its market cap to over $2.6 trillion.

AMD is behind on AI, but could benefit from Intel woes

AMD’s stock has underperformed for two key reasons. First, it has suffered from the ongoing slow recovery of the PC industry, which is an essential part of AMD’s business. 

The most recent report by Gartner showed that global PC sales jumped to 60.6 million in the second quarter, with Lenovo, HP, and Dell having the biggest market share. While these are good numbers, they represented less than 2% increase. 

Second, AMD stock has struggled because of its small market share in the GPU industry, which is now dominated by Nvidia. Data shows that AMD has a 15% market share in the GPU industry.

Where Nvidia wins, however, is in the Compute Unified Device Architecture (CUDA), a programming model that allows developers to use GPUs for general-purpose processing. 

CUDA has the biggest market share in the industry and allows companies to take its GPUs and repurpose them for use in the artificial intelligence (AI) industry. 

AMD has already launched Radeon GPUs, which target the AI industry. For example, RDNA 3 delivers 2x AI performance than RDNA 2. It does this by having 2 AI accelerators per compute unit, has a large VRAM, and is widely compatible.

There are chances that these AMD chips will start gaining market share in the data center industry because of the significant demand by large companies like Microsoft and Alphabet. Besides, its MI300 chips are of a higher quality and of a lower price.

The most recent results showed that AMD was capturing market share in the AI data center industry. Its revenue rose from $1.3 billion in Q2’23 to $2.84 billion in Q2’24. 

Another potential catalyst for AMD in AI is that Intel, the other potential competitor, is struggling. Its data center revenue dropped by 3% in Q2 to $3 billion, a surprising situation considering the substantial demand.

Therefore, analysts expect that AMD is best positioned to take some market share from Nvidia in the coming years.

AMD is facing more challenges

AMD’s main challenge is whether its growing data center business will help offset the weakness in other weak areas of its business.

For example, the most recent financial results showed that its gaming revenue dropped by 59% last quarter to $648 million. It also fell by 30% from the first quarter.

While gaming is still a big industry, there are signs that its weakness will continue in the foreseeable future because people are no longer gaming as they used to during the COVID-19 pandemic. 

AMD’s embedded business is also not doing well. This segment grew from AMD’s $50 billion acquisition of Xilinx. The business helps companies create advanced chips for large industries like gaming and healthcare.

In the last quarter, its embedded revenue dropped by 41% to $861 million, while its operating income fell by 54% to $345 million. 

Valuation concerns remain

The other top challenge is that AMD has become one of the most overvalued companies in the US with a market cap of over $263 billion. 

This is a big number for a company whose revenue growth has stalled. Its third-quarter revenue grew by 9% to $5.8 billion. 

Analysts expect that its third-quarter revenue metric will rise by 15% to $6.7 billion, while its annual revenue will be $25.6 billion. 

These numbers mean that AMD’s forward price-to-sales ratio is 10.8, higher than that of most Wall Street companies.

Its forward GAAP price-to-earnings ratio 130, which is higher than the industry median of 29 and Nvidia’s 45. This is notable because these are comparable companies that were started years ago. Nvidia was started in 1993, while AMD has been in business since 1969.

AMD stock price analysis

(Click on image to enlarge)

AMD chart by TradingView

The next important AMD stock catalyst will be its upcoming earnings on October 29, which will provide more colour on its data center business.

Before that, the stock formed an inverse head-and-shoulders pattern, a popular bullish sign. It has also formed a golden cross pattern as the 200-day and 50-day moving averages have made a bullish crossover.

Therefore, the stock will likely continue rising as bulls target the next key target at $187, its highest point in July, which is about 10% above the current level. A break above that level could see it rise to the year-to-date high of $227, which is 33% above the current level.

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