When it comes to chips for artificial intelligence (AI), Advanced microdevices (AMD -1.53%) continues to play second fiddle to leader Nvidia. However, it still benefits from the overall development of AI infrastructure, as customers seek to at least retain Nvidia (NVDA 1.99%) honest by purchasing some of their tokens elsewhere.

While AMD saw strong AI-related growth, investors nonetheless sold its shares. Shares are now trading in positive territory for the year.

Let’s take a closer look at the chipmaker’s third-quarter results to see if this is a buying opportunity or a sign that there could be cracks in the market. history of AI development for AMD.

Data Center Growth

In the third quarter, AMD saw its sales increase 18% year-over-year to $6.8 billion. Adjusted earnings per share (EPS) were $0.92, up 31%. This is a nice acceleration in growth compared to the second quarter, where sales increased by 9% and adjusted EPS by 19%.

Its data center business once again led the way, with revenue soaring 122% year-over-year to $3.5 billion, and up 25% sequentially. The segment is driven by sales of its Instinct graphics processing units (GPUs) and EPYC central processing units (CPU). AMD said its EPYC processors have seen significant deployments at large cloud companies, such as Microsoft And Metaplatformsas well as with enterprise clients such as Adobe, BoeingAnd Nestle.

Its customer segment also showed strong growth, up 29% to $1.9 billion. This was due to demand for its Zen 5 processors. However, gaming sector revenue declined sharply, down 69% to $462 million, and integrated revenue, down 25% to $927 million. . Adjusted gross margins increased by 250 basis points to 53.6% and increased by 50 basis points in sequence.

For the quarter, AMD generated free cash flow of $496 million. The company ended the quarter with net cash and short-term investments of $4.5 billion and debt of $1.7 billion.

Looking ahead, the company expects fourth-quarter revenue of $7.5 billion, or about $300 million. This would represent growth of 22% at the midpoint, demonstrating continued acceleration. It increased its GPU data center revenue forecast for the full year from over $4.5 billion to now over $5 billion. dollars.

Looking ahead to 2025, AMD said it remains optimistic about continued data center growth as companies continue to make significant investments to expand their infrastructure to run AI workloads. He also said customers are starting to expand their workloads running its GPUs.

Image source: Getty Images.

Is it time to buy the dip?

Like its larger rival Nvidia, AMD sees its growth driven by continued demand linked to the development of AI infrastructure. However, the company has seen more success with AI Inferencealthough he has made some progress in training on large language models (LLM). Although AMD is unlikely to challenge Nvidia’s dominance, it is carving out a nice niche for itself. Meanwhile, given how quickly the AI ​​infrastructure market is growing, if it manages to gain just a small share, it will equate to significant growth for the company in the future.

The pending acquisition of ZTE Systems (which designs and manufactures servers, storage systems, accelerators and other data center equipment) will help the company be even more competitive in the data center space, allowing it to sell end-to-end system solutions that can integrate its GPUs, CPUs and networking equipment. It should also enable faster deployments, which should attract companies that have been rushing to build out their data center infrastructure.

From a valuation perspective, AMD trades at a forward price/earnings ratio (P/E) of 27.5 times next year’s analyst estimates. Considering the growth opportunities available to it, this is a pretty reasonable valuation.

AMD PE ratio (1-year term) data by Y charts.

While I would still prefer Nvidia in this area given its extraordinary growth, I think AMD should continue to benefit from building AI-powered data centers. Additionally, the acquisition of ZTE could enable it to make more inroads into the data center space.

As such, I think investors can buy the stock following the recent decline, as I see no indication of cracks in the AI ​​infrastructure story.