The stock market kicked off 2025 with a mix of excitement and uncertainty, and the first few weeks of the year were particularly interesting for technology stocks. The AI narrative, which has been a driving force for much of the last two years, continued to propel tech stocks forward. However, the momentum hit a roadblock in late January when a Chinese startup called DeepSeek unveiled an AI model that seemed to rival OpenAI’s ChatGPT. What caught investors off guard was DeepSeek’s claim that it had developed its AI technology at a significantly lower cost than U.S.-based companies like OpenAI, Anthropic, and Perplexity. This revelation sent shockwaves through the market, leading to a sharp decline in technology stocks, with chip stocks taking a particularly hard hit.
One of the biggest casualties in this downturn was Advanced Micro Devices (AMD), whose shares fell by approximately 10% following the news about DeepSeek. This raised questions about whether AMD’s current valuation makes it a good time to buy. To answer this, it’s important to dive into AMD’s financials, particularly its forward price-to-earnings (P/E) ratio and market capitalization. Over the past year, AMD’s forward P/E has fluctuated significantly, dropping from a high of 53.8 in March 2024 to 25.6 as of now. Despite this, AMD’s market capitalization has grown by about $30 billion over the same period, standing at $194 billion. This suggests that while the company’s valuation has cooled down, it still commands a significant presence in the market. The stability in AMD’s forward P/E indicates that analysts expect the company’s earnings growth to keep pace with its stock price, balancing out any potential risks or slowdowns in certain segments.
Looking deeper into AMD’s financial performance, the company’s data center business stands out as a bright spot. In 2024, AMD’s data center revenue surged by 94% to $12.6 billion, driven by strong demand for its MI300 accelerators from major players like Microsoft and Meta Platforms. This growth is particularly impressive given that these customers are also using Nvidia’s products, indicating that AMD is carving out a significant niche in the data center market. However, AMD’s success in this area is somewhat overshadowed by lackluster performance in its gaming and embedded units, which have struggled to keep up with the data center segment’s momentum. This dichotomy has led investors to focus on the potential risks associated with AMD’s broader portfolio, even as the data center business continues to shine.
Despite these challenges, AMD’s data center business is likely undervalued by the market. If we assume that the market is currently valuing AMD’s data center operations at around $30 billion—based on the increase in its market capitalization since September 2023—it’s clear that this figure doesn’t fully capture the segment’s long-term potential. For context, Nvidia’s compute and networking business is significantly larger and has been a major driver of the company’s valuation growth over the past two years. Given AMD’s growing adoption among hyperscalers and tech giants, it’s reasonable to believe that AMD’s data center business could become a much more substantial contributor to its overall valuation in the future. This makes AMD’s current stock price appear discounted relative to its peers, presenting a potential buying opportunity for investors who believe in the company’s ability to compete effectively in the data center space.
The current market sentiment around AMD is a mix of optimism and caution. On one hand, the data center business is a clear growth engine, and AMD’s partnerships with major cloud providers and tech companies underscore its potential to become a formidable player in this space. On the other hand, the company’s reliance on its data center segment to drive growth, coupled with the underperformance of its gaming and embedded units, raises concerns about its ability to maintain consistent revenue and profit growth in the short term. Additionally, the broader market’s reaction to DeepSeek’s AI model serves as a reminder of how quickly investor sentiment can shift in the technology sector, where competition and innovation can rapidly alter the landscape.
Ultimately, AMD’s stock presents an intriguing opportunity for investors who are willing to take a long-term view. While the company faces challenges in certain segments, its data center business is well-positioned for sustained growth, and its current valuation seems to understate the potential of this segment. For those who believe in AMD’s ability to carve out a larger share of the data center market, now could be a good time to consider buying shares. However, it’s always important to approach any investment decision with caution, considering both the potential upside and the risks involved. As the technology landscape continues to evolve, AMD’s ability to adapt and innovate will likely play a crucial role in determining its success in the years to come.
