SoundHound AI has been one of the hottest artificial intelligence (AI) stocks on the market in 2024, clocking stunning gains of 936% as of this writing on the back of several favorable developments such as its outstanding growth, an investment from AI pioneer Nvidia, and positive coverage on Wall Street of late from analysts who believe that this voice AI solutions provider could be a big winner in the long run.
The good part is that SoundHound AI has been growing at an incredible pace and seems to be making the most of the huge addressable opportunity on offer in the voice AI solutions market by building a solid customer base. However, the bad part is that the stock is extremely expensive right now following its remarkable surge in 2024.
It is now trading at 109 times sales. For comparison, AI bellwether Nvidia has a price-to-sales ratio of 31 even after the outstanding growth that it has been clocking in recent quarters and the dominant position that it enjoys in the AI chip market. So, investors would do well to look for alternatives to SoundHound if they are looking to jump on to the AI bandwagon.
Advanced Micro Devices (AMD -0.74%) is one such alternative that investors can consider buying right now to make the most of the proliferation of AI. Here are some of the reasons AMD could be one of the best AI stocks to buy heading into the new year.
A solid turnaround could be in the cards for AMD in 2025
AMD stock has underperformed the market in the past year, losing 16% of its value while the broader PHLX Semiconductor Sector index has clocked 20% gains over the same period. AMD’s weak influence in the AI chip market is one of the key reasons behind its underperformance.
After all, the chipmaker expects to sell just $5 billion worth of AI graphics processing units (GPUs) that are deployed in data centers. For comparison, rival Nvidia’s revenue from the data center business came in at a record $30.8 billion in the previous quarter, rising 112% from the year-ago period. However, the silver linings in AMD’s AI chip business should not be ignored.
The company’s data center revenue increased 122% year over year in the third quarter of 2024 to $3.5 billion, driven by the growing sales of its AI GPUs and server processors. Another thing worth noting here is that AMD has kept increasing its data center GPU sales forecast throughout 2024. It was initially hoping to sell just $2 billion worth of data center GPUs at the beginning of the year. So, the consistent increase in the company’s sales forecast means that it is gradually gaining traction in this market.
The good news for AMD investors is that its data center GPU sales could keep growing at a nice clip in 2025 as well, driven by strong demand and an improving supply chain. On its October 2024 earnings conference call, AMD CEO Lisa Su pointed out that the company has “planned for significant growth” in its AI chip supply for 2025.
After all, AMD’s foundry partner, Taiwan Semiconductor Manufacturing, is reportedly going to double its advanced chip packaging capacity by the end of 2025. Although Nvidia has reportedly secured 60% of TSMC’s advanced chip packaging for 2025, it still means that AMD can witness a nice jump in production of its AI chips next year, leading to further growth in its data center revenue.
Importantly, AMD doesn’t need to beat Nvidia to drive substantial growth in its revenue and earnings. After all, AMD management expects the AI accelerator market to hit $500 billion in revenue in 2028. So, even if Nvidia remains the dominant player and AMD manages to eke out even a 10% share of this market over the next three years, its data center GPU revenue could grow tenfold from 2024 levels.
Moreover, there is an additional AI-related catalyst for AMD in the form of the personal computer (PC) market. Global AI PC shipments are expected to jump to 114 million units in 2025 from an estimated 43 million in 2024, according to Gartner, and AMD is well placed to capitalize on this growth. According to Su, “HP and Lenovo are on track to more than triple the number of Ryzen AI Pro platforms they offer in 2024, and we expect to have more than 100 Ryzen AI Pro commercial platforms in the market next year, positioning us well for share gains as businesses refresh the hundreds of millions of Windows 10 PCs that will no longer receive Microsoft technical support starting in 2025.”
All this explains why analysts are forecasting a robust turnaround in AMD’s financial performance next year.
Stronger growth and an attractive valuation make the stock worth buying
Analysts are expecting AMD’s revenue to increase 13% in 2024 to $25.6 billion, along with a 26% jump in the bottom line to $3.33 per share. The following chart clearly shows that a significant acceleration is expected in AMD’s growth in 2025.
AMD Revenue Estimates for Next Fiscal Year data by YCharts
The stock is currently trading at 25 times forward earnings, which is a discount to the tech-laden Nasdaq-100 index’s earnings multiple of 33 (using the index as a proxy for tech stocks). Assuming AMD trades at even 30 times earnings after a year and achieves $5.10 per share in earnings in 2025, its stock price could jump to $153. That would be a 25% jump from current levels.
Of course, more upside cannot be ruled out if AMD manages to deliver stronger bottom-line growth and the market decides to reward it with a higher valuation as a result. That’s why investors looking to buy an AI stock that’s trading at a reasonable valuation and has the potential to deliver healthy gains in 2025 should consider taking a closer look at AMD instead of expensively valued stocks such as SoundHound.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, HP, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
