Is AMD’s Latest Deal a Game-Changer?

When it comes to investing in semiconductor stocks, Nvidia is the top name that comes to mind. However, while the company’s H100, A100, and Blackwell graphics processing units (GPU) remain in high demand, it faces its share of challengers.

Advanced Micro Devices (AMD -2.69%) is Nvidia’s closest competitor. Earlier this month, the company revealed that it was acquiring Silo AI in a deal valued at $665 million. Silo AI is reportedly the largest artificial intelligence (AI) lab in Europe.

Here’s how that purchase could help AMD gain some momentum in its race with Nvidia.

This is not AMD’s first M&A rodeo

Over the last few years, AMD has made a number of strategic acquisitions and AI-related investments. In the last 12 months, AMD has invested $125 million into different AI companies. In fact, just in 2023, the company acquired two AI start-ups — Nod.ai and Mipsology. Moreover, back in 2020, AMD paid a whopping $50 billion to acquire embedded solutions provider Xilinx.

Clearly, acquisitions are a key feature of the company’s growth strategy. Considering the relatively high price it paid for Silo AI, I’m intrigued to see how AMD plans to monetize its newest asset.

Image Source: Getty Images

How are the acquisitions working?

The table below breaks down AMD’s revenue profile by segment.

Data source: AMD. Totals may not sum precisely due to rounding errors.

There is a lot to digest from the revenue trends above. On the positive side, sales on AMD’s data center and client segments are accelerating rapidly. The company’s MI300 GPU is in high demand, and is proving to be a formidable competitor to Nvidia’s impressive roster of high-end chips.

According to management, the MI300 GPU was the fastest-scaling product in AMD’s history — achieving $1 billion in sales in just two quarters. Hopefully, this is a harbinger of what’s to come as semiconductor chip demand continues to be propelled ahead by secular generative AI tailwinds.

One of the lowlights from the quarter was the 46% decline in embedded segment revenue. Management also forecast that segment’s sales would be flat sequentially in Q2. While fluctuating demand trends are acceptable, one reason I’m concerned about the current trajectory of the embedded segment is because it’s where the Xilinx acquisition comes into play. Considering what AMD paid for Xilinx, I would have hoped for that business to be generating more robust growth by now.

Moreover, after combing through the company’s latest earnings call transcript and 10-Q filing, I did not find any mentions of Nod.ai or Mipsology. Considering that the prices for these deals were left undisclosed, I wonder how much revenue AMD is really generating from these assets.

Is AMD stock a buy right now?

The charts below illustrate the growth of revenue, gross profit, and free cash flow between Nvidia and AMD over the last 18 months.

NVDA Revenue (Quarterly) data by YCharts.

The obvious takeaway is that Nvidia’s business is surging at record rates while AMD is struggling to keep up. Despite some encouraging momentum tied to its new GPU, AMD doesn’t appear to be in the same league as Nvidia.

Furthermore, right now, AMD trades at a forward price-to-earnings (P/E) multiple of 50.7. By comparison, Nvidia’s forward P/E is 46. It’s hard to justify why shares of AMD are trading at a higher forward multiple than Nvidia given the disparity between each company’s growth rates.

Considering the number of acquisitions it has made over the last couple of years, I would have hoped for better results. At this point, I think it’s fair for investors to question AMD’s capital allocation. It seems like the company may be resorting to acquisitions in an effort to stay relevant while Nvidia passes it by. While the deal with Silo AI is interesting, I am not sold on the idea that it will be a game-changer for AMD right now.

Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.