In this increasingly uncertain market, investors are right to be cautious when picking stocks for their portfolios. Inflation is still raging, interest rates are rising, and tech stocks continue to see downside volatility. Indeed, Advanced Micro Devices (NASDAQ:AMD) reflect this volatility well, currently trading at roughly double the stock’s 52-week low, but down 20% from its peak.

Impressively, AMD’s valuation has held strong, with the stock trading around 8 times sales and 26 times forward earnings. While certainly a lower valuation than Nvidia’s (NASDAQ:NVDA), it’s one that I’m going to be keeping an eye on. More on that later.

That said, I do think there are plenty of reasons for this heightened valuation. The rise of artificial intelligence (AI) and AMD’s role in providing the back-end computing power to support this secular growth catalyst is noteworthy. Until AI-related growth slows, AMD remains a name to watch. And while rival Nvidia will continue to be a dominant player in this space, even if AMD maintains its small market share, this catalyst will be big for growth.

Here’s more on this catalyst and what else I’m watching right now.

AI Growth Could Be Meaningful

Currently, most investors in the semiconductor space have given Nvidia the benefit of the doubt when it comes to dominating the AI space for GPUs and CPUs. That’s probably fair, and I think AMD’s relative position in the overall chip sector is one that is more niche, focused on the company’s EPYC CPUs and Pensando DPU. These are products that can benefit from the AI boom but may be less ubiquitous than the products offered by Nvidia.

That said, I do think AMD’s recent acquisition of French firm Mipsology is an acquisition worth watching. The company is looking to gain AI inference and optimization tools as a result of the deal, with AMD’s focus on improving its position within the AI sector on full display as a result of this deal. Notably, AMD will also absorb Mipsology’s skilled labor, something that will be important if AMD is going to make a shift into the software space.

Now, transitioning from a hardware-focused player to a software play as well is likely to provide some turbulence. That isn’t a foolproof strategic move by any stretch. However, if AMD can pull this off, I think it could be big for those betting on the AI revolution. I’m watching this closely and will provide updates moving forward.

Valuation Still Matters

Like its competitors, AMD certainly has some top-notch growth prospects. That’s undeniable and why I’m still bullish on the stock over the long term.

However, over the near- to medium-term, there are some concerns I think could lead to some downside volatility. Chief among these concerns is valuation, as previously mentioned.

I recently penned a rather intriguing piece on AMD’s valuation, starting the article off with the statement, “When Cathie Wood believes a particular growth stock is overvalued, that speaks volumes.” The article was about Arm Holdings’ (NASDAQ:ARM) IPO, but the idea holds for most players in the chip sector.

If enough growth investors don’t believe in the valuations of companies in the chip sector or demand somehow falls apart for these chips, the companies could see significant downsides. After all, at many multiples of these companies’ revenue, chip stocks continue to trade in what I would consider to be the nosebleeds of companies with nosebleed valuations right now.

What Now?

Moving forward, I think it’s going to be important for investors in AMD, or any chip maker for that matter, to pay close attention to how these companies actually deliver in the coming quarters. Like its peers, AMD will need to continue to grow into its valuation. And while the company has thus far been able to impress in this regard, past performance is no guarantee of future success. We’re all aware of this reality, and that’s the investing game. But sometimes it’s important to remind ourselves of this fact.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.