1 Semiconductor Stock Down 65% You’ll Wish You’d Bought on the Dip

The sell-off in stock markets in 2022 was widespread but particularly brutal for the technology sector. During the scale S&P500 As of this writing, the index is down 25%, the tech-heavy Nasdaq-100 Index has lost 34%.

But if you zoom out and compare their performances over the past five years, the picture is very different. The Nasdaq 100 is up 77%, nearly double the S&P 500’s 40% gain. This supports the widely held belief that long-term investments tend to yield the greatest benefits.

Investors could apply this strategy to semiconductor stocks modern micro devices (AMD -5.09%), which is down 65% from its all-time high. Semiconductors continue to grow rapidly, and the sector could be worth as much as $1.5 trillion annually by 2030. AMD is a top-tier manufacturer and one investors should buy now.

Semiconductors are down, but certainly not out

Semiconductors are the computer chips that power our everyday digital experiences, from smartphones to cars. The pandemic disrupted their manufacturing as manufacturing facilities were temporarily closed and supply chains became entangled, leading to chip shortages in 2020 and 2021. At the same time, demand increased as people who worked from home and attended school, realizing the need to upgrade their chips in computers and gadgets, and the inability to participate in many group leisure activities gave a boost to the popularity of video games.

Those trends have largely reversed in 2022, and AMD is far from the only company in its niche to see sharp falls in value. That iShares Semiconductor ETF, a barometer for the broader sector, is down 43% year-to-date. But it’s up 112% over the past five years, even outperforming the Nasdaq 100 index.

AMD has one of the most diversified product lines in the industry in terms of its end users. It produces chips for game consoles, computers, virtual reality headsets and more Teslaelectric vehicles. However, the data center segment is the most important one for the company. It has deals with some of the largest cloud computing service providers in the world, including Amazon web services and Microsoft azure.

Data centers have become more than just places to store information. They are now hives of computing activity, where artificial intelligence and machine learning models are trained to understand mountains of data that humans could never process manually. Valuable insights can be gleaned from these analytics, helping businesses serve customers more efficiently—and ultimately make more money.

AMD could be set for a bumpy end to 2022

On Oct. 6, AMD released preliminary third-quarter results and said it posted estimated revenue of $5.6 billion for the period. That was a big miss from the $6.7 billion the company had previously forecast.

The biggest drag on results was the client segment, where revenue shrank 40% year over year on falling demand for PCs. But the big winner was the data center segment, where revenue rose a whopping 45% to $1.6 billion. AMD posted modest gains in its gaming and embedded segments, and while the company’s overall revenue missed expectations, it was still up 29% from the year-ago period.

The key for investors here, however, is to focus on the bigger picture, as AMD is still on track for a 49% increase in full-year revenue despite its third-quarter woes. In addition, its long-term development cannot be denied based on the chart below.

A chart of AMD's growing annual revenue.

AMD’s acquisition of Xilinx could be the key

AMD recently completed its $49 billion acquisition of Xilinx, which could offer shareholders gains over the next five to 10 years. Xilinx is a global leader in adaptive computing, developing innovative chips that can be repeatedly optimized in real time – after they are installed – to adapt their capacities to each specific application that is needed.

AMD believes this is the next big opportunity in high-performance computing, particularly in areas like artificial intelligence where solid-state chip hardware isn’t evolving fast enough to meet demand. The ability of adaptive chips to be reconfigured many times after they are manufactured is in stark contrast to typical chips, which must be completely replaced to be upgraded.

Simply put, the 65% drop in AMD stock has most likely created a long-term buying opportunity. In some ways, this year has been more challenging for the company than 2020 or 2021, and 2023 may bring its own set of hurdles, but AMD continues to drive its business forward. Five years from now, investors will likely look back and see that AMD stock traded at bargain prices in the fall of 2022.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Microsoft, and Tesla. The Motley Fool has a disclosure policy.