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When it comes to investing in Advanced Micro Devices (NASDAQ: AMD) for its artificial intelligence (AI) chips, it may seem like a bad call given Nvidia's market lead. Indeed, with Nvidia holding an estimated 80% or more of the market according to estimates, it may seem counterproductive to buy AMD stock because of its AI.

However, AMD has a long history of catching up to competitors. Moreover, it appears to have made a move that could make the semiconductor stock a major player in the AI chip market.

AMD's latest move

On July 10, AMD announced it would acquire Silo AI. The purchase will cost AMD $665 million, and that investment will bring Europe's largest AI lab under its control. Silo AI's mission is to help organizations implement the most advanced AI technology available, a factor that should work to AMD's benefit.

This purchase also helps AMD build on its acquisition of Nod.ai, an AI software company which it acquired last fall. Such improvements on the software side should bolster AMD's MI300 series of accelerators, improving its chances of keeping pace with Nvidia and other companies.

AMD shareholders should also note that Nvidia's data-center segment, which makes AI chips, now accounts for 87% of company revenue, a dramatic change from the days when it was mainly a gaming-chip company. AMD's data-center segment grew its revenue by 80% yearly in the first quarter of 2024. If the data-center segment can maintain that growth rate, it could become the dominant part of the company, similar to Nvidia's data-center segment.

Other parts of AMD

Nonetheless, investors should not forget its other segments, which collectively make up almost 60% of AMD's revenue. The Client segment, which designs PC chips, grew by 85% yearly as it recovered from a longtime slump. Its Ryzen 8000 series processors have become popular with customers as this part of the semiconductor industry begins to bounce back.

However, some parts of the chip industry remain in a slump. One is gaming, whose revenue dropped 48% from year-ago levels due to slumping graphics processing unit (GPU) sales. Additionally, AMD's Embedded segment, most of which came from the purchase of Xilinx in 2022, experienced a 46% revenue drop as customers cut spending.

AMD's performance as a company

The underperforming segments nearly wiped out the gains of the high-performing parts of the business. In Q1 2024, revenue of just under $5.5 billion rose by only 2% compared with the previous year.

Still, AMD reported a $123 million profit in Q1, up from a $139 million loss one year prior. Also, if AMD meets its midpoint-revenue estimate in Q2 of $5.7 billion, revenue growth will rise to 6%. That growth rate is still a small fraction of Nvidia's, but it is a sign that AI chip sales are beginning to have a positive effect on the financials.

Also, AI-fueled optimism likely took the stock more than 60% higher over the last year. Nonetheless, its forward price-to-earnings (P/E) ratio of 53 may be skewed when considering the company's recent return to profitability. Also, the price-to-sales (P/S) ratio of 13 may seem high, but it still compares favorably to Nvidia's 42 P/S ratio. That difference could spur AMD's stock-price growth in the foreseeable future.

Is AMD stock a buy now?

Given its current state, AMD remains a buy, and the Silo AI acquisition reinforces the AMD investment case. Admittedly, such improvements do not mean AMD will unseat Nvidia as the leading AI chip company in the foreseeable future.

However, Nvidia has shown that AI chips are currently the industry's most important product, and anything that bolsters AMD's ability to compete is a positive. Also, if AMD can come close to matching the 87% of company revenues that come from the data-center side of the business, it should take AMD stock much higher over time.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.