Hitting an all-time high in March, Advanced Micro Devices (NASDAQ:AMD) stock is one of the most-watched AI semiconductor plays in the market. With positive remarks of its AI processors and running closely behind Nvidia (NASDAQ:NVDA), I think AMD stock is one to own for the long-term.
AMD’s Q1 Data Center revenue surged 80% to $2.3 billion due to strong MI300 AI chip sales. AMD expects $4 billion in AI chip sales this year, double the previous estimate.
The MI300 chips have generated over $1 billion in sales within six months of their launch. AMD is creating new AI chips and successors to current processors. Over the past year, AMD stock has risen 40%.
With these new AI chips to be released and a strong financial standing, it’s possible AMD has what it takes to compete with Nvidia over the long-term. Let’s dive into why this may be the case moving forward.
AI Chips Challenging Nvidia
On Monday, AMD unveiled new AI chips for data centers and advanced laptops, challenging market leader Nvidia. AI processor demand has surged, driven by applications like ChatGPT.
AMD announced next-gen processors to compete with top competitors like Nvidia, in a bid to attack market share in this lucrative segment of the market.
“AI is our top priority,” said AMD CEO Lisa Su at Taiwan’s Computex. She highlighted AI’s transformative impact on businesses and computing. Su announced AMD’s annual update cycle for advanced accelerators, with the Instinct MI325X set for release this year, mirroring Nvidia’s schedule. Su also showcased partnerships with Microsoft, HP, Lenovo, and Asus, integrating AMD’s Ryzen processors in their AI-powered computers.
Microsoft (NASDAQ:MSFT) has invested billions in OpenAI and integrated AI into its products. This month, the company introduced Copilot+ “AI PCs” with built-in AI, running Windows.
Microsoft CEO Satya Nadella announced AMD’s Ryzen processors will power these machines, highlighting their long-standing partnership across multiple platforms, including AI. Nadella emphasized the transformative impact of the AI platform shift in a video message during Su’s speech.
AMD Stock Has Strong Financials
When it comes to liabilities and cash management, AMD seems to have everything under control. Although the company does have $6 billion in liabilities due in 12 months, its current cash flow is at $6 billion and $5 billion in receivables covers this debt well.
Given AMD’s size, its liquid assets balance well with its total liabilities. Despite notable liabilities, AMD has more cash than debt, indicating it can manage its debt safely. Monitoring its balance sheet remains important.
The company also saw its EBIT grow by 203% in twelve months, easing future debt repayment. While the balance sheet is key for debt analysis, future profitability will determine if AMD can strengthen its finances.
Despite having a solid amount of net cash on its books, it’s crucial to see how well AMD converts EBIT to free cash flow, as this affects its debt management. Impressively, over the last three years, AMD generated more free cash flow than EBIT, highlighting its strong cash conversion.
Bet on AMD
AMD’s high valuation stems from its earnings growth and high expectations for its new AI chips. Seen as Nvidia’s main AI chip competitor, AMD is benefiting from soaring global demand. Over the past year, AMD shares rose 36%, and over five years, they increased 523%.
With AMD’s AI offerings rapidly expanding, the company has emerged as a sleeper investment with significant growth potential. Nvidia faces challenges maintaining its rapid growth pace, potentially allowing AMD to achieve similar growth rates. While business volumes may differ, AMD stock is likely to outperform, at least in my view.
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.
