Advanced Micro Devices (AMD 0.02%) has become a favorite on Wall Street this year, with its stock up about 72% since Jan. 1. Investors have grown bullish over the company's prospects in artificial intelligence (AI). The market hit $137 billion in 2022 and is projected to expand at a compound annual growth rate of 37% through 2030. Meanwhile, AMD's position as a leading chipmaker suggests it could play a crucial role in that growth.

However, the AI market has attracted countless new tech companies striving to profit from its potential. For now, AMD's biggest competitor in AI chips is Nvidia, but Amazon and Intel have projects in the works that could make it challenging for the company to expand in the space.

As a result, before making a significant investment in AMD's stock, it's wise to understand the positives and negatives of the company's prospects.

So, here are the bear and bull arguments for AMD.

Bear: Increasing competition in AI
AMD appeared to start 2023 at a disadvantage in the AI market. Its longtime rival, Nvidia, had seemingly gotten a massive head start in the industry, achieving an 80% to 95% market share. AMD responded by unveiling its most powerful graphics processing unit (GPU) to date in mid-June, the MI300X. The new chip is meant to compete directly with Nvidia's AI hardware, yet which companies will sign on to purchase it remains to be seen.

The good news is that many of Nvidia's clients and other tech companies are rooting for AMD to succeed, as it will create more competition and reduce the cost of AI chips.

In fact, the world's second-largest cloud company, Microsoft, is reportedly supporting AMD's AI chip expansion by providing financial and engineering resources. Microsoft aims to create an alternative to Nvidia, which bodes well for AMD's prospects.

However, it looks like other companies are hoping to take advantage of the need for competition in the market. The biggest threat to AMD's journey to match Nvidia seems to be Amazon. The e-commerce giant is home to the world's biggest cloud platform, Amazon Web Services (AWS), and recently announced it has developed two soon-to-launch AI-specific chips called Inferentia and Trainium.

Amazon CEO Andy Jassy recently told CNBC the chips will have "much better price-performance than you'll find anywhere else."

Amazon's stature in the cloud market and vast resources could be a major challenge for AMD. However, the semiconductor company's decades-long experience in the chip industry and Microsoft at its side could take it far. Meanwhile, the rapidly rising demand for AI chips could offer more than enough business for AMD, Nvidia, and Amazon.

Bull: A diversified business model
Despite a potentially problematic AI expansion, AMD boasts a thoroughly varied business that could keep earnings up as it navigates the competitive sector. The company has solid positions in cloud computing, consumer PC components, video games, and embedded products.

AMD's highest-earning segment -- gaming -- in fiscal 2022 made up about 29% of all earnings, with revenue having a pretty healthy split between four different segments.

Despite economically challenging conditions last year that affected countless tech companies, AMD reported revenue growth of 44% in 2022 as it hit $24 billion. One of the company's biggest growth areas was data centers, which includes earnings from partnerships with cloud companies like Microsoft's Azure, Alphabet's Google Cloud, and Oracle.

Meanwhile, revenue in its gaming segment rose 21% year over year, bolstered by AMD's position as the exclusive supplier of chips to Sony's PlayStation 5 and Microsoft's Xbox Series X and S game consoles.

AMD's stock has climbed 604% in the last five years alone. In the same period, revenue rose 265%, while operating income has increased 180%.

Advanced Micro Devices has grown into a tech behemoth as its chips have become crucial to the development of multiple markets. The company's future in AI may be uncertain, but its other businesses will likely continue to expand over the long term.

Source:  www.fool.com