1 Incredible Reason to Buy Advanced Micro Devices (AMD) Stock in November

After a steep slide earlier this year, shares of Advanced Micro Devices (NASDAQ: AMD) have rebounded strongly in the second half. The stock had already been on the rise for months when it jumped sharply in October after news broke of the chipmaker's deal to supply ChatGPT maker OpenAI with 6 gigawatts worth of Instinct graphics processing units (GPUs) starting next year.

With all those gains in the rear-view mirror, some investors might wonder if AMD stock is still a good investment. CEO Lisa Su might have answered that question on the company's Oct. 6 conference call to discuss the OpenAI deal.

"Artificial intelligence (AI) is the most transformative technology of the last 50 years, and we are in the very early stages of the largest deployment of compute capacity in history," Su said during that call.

It's clear she believes that this is just the beginning of a long-term spending cycle in AI infrastructure that could fuel impressive growth for its business.

Image source: Getty Images.

A $500 billion addressable market

The deal with OpenAI shows AMD is competitively positioned to benefit from the buildout of new data centers to support growing demand for AI services like ChatGPT. OpenAI already has over 700 million weekly users, and that figure will likely grow into the billions, considering how powerful these AI models are becoming.

The demand for the high-end chips needed to support the growth in AI infrastructure could be a $500 billion opportunity, based on AMD's previous estimate for its long-term addressable market. AMD has seen firsthand from its internal use the improvements AI can bring to coding and other tasks, and it has only been a few years since the AI wave started.

AMD's data center revenue reached $3.2 billion last quarter, representing growth of 14% from the year-ago quarter. Not only is it benefiting from GPU demand, but it also posted record sales of its EPYC central processing units (CPUs), thanks to high demand from cloud computing and enterprise customers.

Moreover, investors should expect AMD's data center business, which provided 42% of its total revenue last quarter, to grow at an accelerating rate over the next year. OpenAI's demand will obviously be a catalyst, but other leading tech companies, including some of the Magnificent Seven, also use AMD's chips.

AMD's earnings expected to soar

AMD will enjoy a fresh competitive advantage as the bulk of AI workloads shift from training to inferencing, in which developed models make predictions from new data. AMD designed its Instinct line of GPUs to offer performance leadership in AI inference. Its chiplet architecture will not only provide performance boosts for inference workloads, but importantly, will allow AMD to rake in huge profits.

As AMD's data center revenue picks up, analysts expect its earnings per share to grow at an annualized rate of 39% over the next several years. Even after the recent rise in the stock, it trades at just 37 times next year's estimated earnings. That is still reasonable relative to its underlying growth in earnings, which leaves the stock in a good position to deliver more gains over the next few years.

John Ballard has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.