Is AMD Stock Due for a Big Rally After Its Earnings Beat?

Advanced Micro Devices (NASDAQ: AMD), also known as AMD, reported earnings on May 6, and they were impressive. The chipmaker has been showing signs of progress and a faster growth rate. That could be indicative of the competition that its chips may offer to rival Nvidia, potentially giving the tech giant something to worry about.

AMD's stock has been struggling over the past couple of years, while Nvidia has been soaring. But with stronger results and some encouraging growth prospects, is it now time for AMD's stock to shine? Could the company's recent earnings numbers be a catalyst to drive its valuation far higher this year?

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AMD's fastest growth since 2022

AMD's first-quarter report delivered something growth investors have been craving for a while now -- strong growth numbers. Revenue rose by 36% year over year to $7.4 billion. That was the company's fastest rate of growth in more than two years, and the top line came in better than the $7.1 billion that Wall Street was expecting.

AMD Operating Revenue (Quarterly YoY Growth) data by YCharts.

The big catalyst for the business was its data center segment, which experienced a 57% growth rate during the period. This was due in part to strong demand for its Instinct chip; the company launched its newest version, the Instinct MI325X, in the fall of last year and said at the time that it would be shipping it in large quantities in the early part of 2025. The Q1 results could be the first sign that the chips are winning over customers and may be able to take some market share from Nvidia.

What could hinder the stock

Shares of AMD rallied in the days following the earnings release. However, it may not necessarily be smooth sailing for the chipmaker due to a couple of issues.

The first pertains to the ongoing trade war between the U.S. and China. Due to U.S. export restrictions on China, AMD expects to miss out on $1.5 billion in potential revenue this year. Recently, however, there have been reports that the two nations are making progress on a potential trade deal and have paused most of the heavy tariffs they have levied on each other for 90 days.

The uncertainty makes it difficult to predict how AMD will do this year. It's an evolving situation that investors should closely monitor.

Another issue is that AMD's valuation remains high at 75 times its trailing earnings. The good news is that the ratio drops to 25 when looking at its future earnings (based on analysts' consensus expectations). But when you consider that Nvidia's forward price-to-earnings multiple is just under 27, that may not be enough of a discount to convince investors to go with AMD instead of its bigger rival.

Is AMD stock a good buy today?

AMD's stock is down by close to 30% from where it traded a year ago, but it has been rising recently and could head higher, especially if the company can build on its Q1 results and accelerate its growth rate. But that's not a guarantee by any means, given the uncertainty around tariffs and the ongoing trade war with China.

AMD could be a good artificial intelligence (AI) stock to own, but it's a riskier option than Nvidia, which has stronger margins and a dominant position in the AI chip market. Depending on your risk tolerance, you may want to go with AMD, Nvidia, or perhaps even hold both in your portfolio.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.