AMD stock slides. Are there cracks in the AI ​​infrastructure story?

When it comes to artificial intelligence (AI) chips, Advanced microdevices (AMD -1.53%) continues to play a secondary role behind leader Nvidia. However, it still benefits from the overall development of AI infrastructure as customers look to at least maintain Nvidia (NVDA 1.99%) honest by purchasing some of their chips elsewhere.

Although AMD showed strong growth in the artificial intelligence space, investors nevertheless sold the stock. The stock is now trading only in positive territory compared to last 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 may be some cracks in AMD’s AI story.

Growth of data centers

In the third quarter, AMD’s sales rose 18% year over year to $6.8 billion. Adjusted earnings per share (EPS) were $0.92, an increase of 31%. This was a nice acceleration in growth from the second quarter, when sales rose 9% and adjusted earnings per share rose 19%.

Its data center business was again the leader, with revenue up 122% year over year to $3.5 billion and up 25% sequentially. The segment was driven by sales of Instinct graphics processing units (GPUs) and EPYC central processing units (CPUs). AMD said its EPYC processors have seen widespread adoption across major cloud companies such as Microsoft And Meta platformsas well as with corporate clients such as Adobe, BoeingAnd Nestlé.

Its consumer segment also saw strong growth, rising 29% to $1.9 billion, driven by demand for Zen 5 processors. However, gaming saw a significant decline in revenue, down 69% to $462 million, and embedded services – by 25% to $927 million. Adjusted gross margin increased 250 basis points to 53.6% and increased 50 basis points sequentially.

During 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 $1.7 billion in debt.

Looking ahead, the company forecast fourth-quarter revenue of $7.5 billion, give or take $300 million. That would represent growth of 22% at the midpoint, signaling continued acceleration. The company raised its full-year GPU data center revenue forecast from more than $4.5 billion to revenue that now exceeds $5 billion.

Looking ahead to 2025, AMD said it remains positive about continued data center growth as companies continue to invest heavily in building out their infrastructure to run AI workloads. He also said that customers are starting to expand their workloads using its GPUs.

Is it time to buy dip?

Like its larger rival Nvidia, AMD’s growth is driven by continued demand for AI infrastructure. However, the company has had more success in its use of artificial intelligence, although it has made some changes to large language model (LLM) training. While AMD is unlikely to challenge Nvidia’s dominance, it has a good niche. Meanwhile, given how quickly the AI ​​infrastructure market is growing, if it manages to gain even a small share, it will represent significant growth for the company moving forward.

The upcoming acquisition of ZTE Systems (which designs and manufactures servers, storage systems, accelerators and other data center equipment) will help the company compete even better in the data center, allowing it to sell complete system solutions that may include its graphics processors, processors and networking equipment. It should also enable faster deployment, which should attract companies looking to build out their data center infrastructure.

In terms of valuation, AMD trades at a forward price-to-earnings (P/E) ratio of 27.5 times analyst estimates for next year. Considering the growth opportunities ahead of it, that’s a pretty reasonable valuation.

AMD PE Ratio data (forward 1 year) from YCharts.

While I still prefer Nvidia in this space given its incredible growth, I still think AMD should continue to benefit from building AI-powered data centers. Moreover, the acquisition of ZTE could give it the opportunity to make further inroads into the data center space.

So I think investors can buy the stock on the recent dip as I don’t see any signs of any cracks in the AI ​​infrastructure story.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Nestlé and recommends the following options: long January 2026 $395 Microsoft calls and short January 2026 $405 Microsoft calls. The Motley Fool has a disclosure policy.