The Case Against Buying AMD's Stock Dip

The market continues to punish Advanced Micro Devices (AMD) stock in the first quarter of 2025, even though the company's business is improving, particularly in revenue growth and operating margins. The problem is that these improvements aren't as strong as the market had hoped, mainly due to the lack of room for runners-up in the data center space. Analysts have consistently lowered their bottom-line estimates for AMD for the next three years, while Nvidia, its main rival, continues to see its estimates rise.
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I'm neutral on AMD stock right now as the semiconductor supplier struggles to convince investors that it's a better investment than Nvidia—which, despite also being down in 2025, trades at similar valuation metrics when adjusted for growth. NVDA's data center business is growing faster, has higher margins, and is still far ahead regarding market share.
So, while the bulls argue this is a good time to buy AMD stock on the dip, citing long-term value up ahead, bearish sentiment and downward revisions are continuing unabated. As things stand, I don't think there will be a reversal for AMD stock in the short or mid-term.
First, it's important to note that AMD's data centers are the key area investors are closely watching. In AMD's most recent quarter, Q4, the company reported a 24% year-over-year growth in revenue, with data centers accounting for 52% of that growth. The data center segment itself saw a 69% year-over-year increase. More importantly, the management team has expressed even greater optimism about its AI prospects. Significant highlights were the ramp-up of the Instinct MI300X data center GPU and its EPYC server CPUs.
Obviously, 69% yearly growth is far from bad, but it's clear that it does not meet investors' high expectations. As Susquehanna's Christopher Rolland points out, much of the selloff in AMD stock over the last year can be attributed to more tempered expectations for the MI300 series. A year ago, incremental MI300 sales were projected to hit $11 billion to $12 billion by 2025. Still, analysts are now revising those expectations to about half that — essentially a 100% drop in expectations for what was supposed to be AMD's most significant growth driver.
Additionally, it doesn't help that other parts of AMD's business, like the PC and gaming segments, are still struggling. Potential headwinds, such as tariffs on China, Canada, and Mexico, could weigh on global PC sales. Plus, the Sony PlayStation 5, which uses a custom AMD-designed CPU and GPU, is now a few years old, and discussions about the next-generation console are likely just around the corner.
One sign that AMD's selloff doesn't reflect worsening fundamentals is the company's margins. AMD's margins have been trending upward over the last decade despite experiencing a significant drop in the past three years due to slowing sales in personal computers and gaming products.
But now, after several consecutive quarters of recovery, margins are rising again. In Q4, the company's operating margins stood at 11%, an increase of 5 percentage points compared to last year.
I wouldn't be surprised if operating margins surpass 20% on a trailing 12-month basis by the end of this year or possibly by mid-next year. The company continues expanding its data center business and launching new products in 2025, like the upgraded AMD Instinct MI350 GPUs for data centers. The launch, which was initially planned for the second half of 2025, has been accelerated due to 'strong customer demand,' the management pointed out. On top of that, AMD recently acquired server maker ZT Systems. These moves should help drive more revenue growth with higher profit margins in the near term.
One of the main concerns hanging over AMD is that the AI GPU market simply doesn't leave much room for runners-up. With both companies trading at similar valuations, why buy AMD at a forward P/E of 15x and a PEG of 0.5x when investors can buy Nvidia stock at a forward P/E of 19x and a PEG of 0.7x? Nvidia remains several steps ahead of AMD, and savvy investors know it.
For example, in Q4, Nvidia's revenue jumped by nearly 80%, almost entirely driven by its data center business, which grew by 93% in the quarter. These numbers are much stronger than AMD's, considering Nvidia is the clear market leader by a considerable margin. Of course, AMD is actively closing the performance gap and seeking out greater market share with its next-generation GPU, which the company's management team has called the biggest generational leap in AI.
However, in the past three months, analysts have revised AMD's EPS consensus downward by 7.8%, 10.1%, and 15% over the next three years. In contrast, Nvidia's EPS consensus for the same period has been revised upward by 1.5%, 2.7%, and 5%. This highlights how bearish the market sentiment remains for AMD, especially regarding its growth prospects in data centers. With the valuation gap not being all that large when adjusted for growth, the market seems to favor Nvidia for the time being.
On Wall Street, the consensus on AMD stock is generally bullish, though with signs of moderation. Out of the 37 analysts covering the stock, 25 are bullish, 11 are neutral, and just one is bearish. AMD's average price target is $147.88 per share, suggesting a potential upside of 53% from the current price.
AMD's fundamentals remain strong, particularly in its data center segment, which has been growing rapidly and contributing more significantly to revenue with the rollout of its MI300X GPUs. However, sales expectations for the MI300 series have fallen short of market hopes, especially given AMD's valuation, which isn't far from its main competitor, Nvidia—the dominant force in the GPU space. While I have no doubt that AMD will continue to thrive in the long run, I believe the valuation gap with Nvidia needs to widen further. In other words, AMD's stock would need to become significantly cheaper to be truly attractive.
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