One figure points to a significant change that could spark considerable stock price growth.
On some levels, Advanced Micro Devices (AMD 2.26%) looks increasingly like a competitor to Nvidia in the artificial intelligence (AI) accelerator market. While almost everyone perceives Nvidia as the dominant player in this market, AMD raised some eyebrows by winning a contract from Oracle.
Still, for all these accolades, AMD is barely profitable, and its revenue growth rate remains mired in the single digits. Also, despite the Oracle contract, AMD is not yet in Nvidia’s league regarding AI accelerators.
Nonetheless, one AMD metric has shown a dramatic improvement. As that figure continues to grow, the semiconductor stock could take its place as a full-fledged Nvidia competitor in the AI accelerator market.
Where investors should look
The important figure is not so much data center revenue as it is data center revenue as a percentage of total revenue. Here’s why: In the second quarter of 2024, AMD’s revenue of $5.8 billion grew by only 9% yearly. But this figure is deceiving. Gaming revenue dropped 59%, while embedded revenue fell 41%.
However, data center revenue, the segment designing AI accelerators, was up 115%! This is significant because Nvidia’s data center revenue was 88% of the company’s total in the latest quarter. Three years ago, it was not Nvidia’s largest revenue source. Now, the same pattern seems to have appeared in AMD’s financials.
In Q2, the data center was 49% of AMD’s revenue, up from only 25% one year ago. Assuming it is going to follow in Nvidia’s footsteps, AMD’s data center revenue appears on track to continue growing rapidly.
Furthermore, the chip industry is cyclical, meaning the gaming and embedded segments are unlikely to experience revenue declines comparable to the ones over the last year. Both factors should mean that AMD’s overall revenue — and, by extension, net income — are likely to experience dramatic surges, helping to draw more investors into AMD.
Ultimately, market leadership for AMD is unlikely anytime soon. However, as long as the data center segment continues to grow as a percentage of the company’s revenue, it should take its stock dramatically higher.
Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
