For all the focus on Nvidia (NASDAQ:NVDA), Advanced Micro Devices’ (NASDAQ:AMD) strategy in the AI space is steadily gaining momentum. While it has yet to benefit significantly from its high-end AI accelerators, the company is set to ship these in Q4. Moreover, large-scale cloud service providers have been considering these accelerators as alternatives to Nvidia. Could there be a setup for AMD stock to outpace Nvidia in terms of overall momentum?

AMD shares fell 7% after reporting weaker guidance than expected. However, this could simply provide more opportunities to buy with a more attractive risk/reward ratio. This will be especially important as we will likely face volatility in the markets until November.

Can AMD Win the High-Stakes AI Race?

Interestingly, despite being rivals, AMD and Nvidia occasionally find themselves working together to create high-performance systems. For instance, Nvidia’s biggest AI win to date, the Selene supercomputer, included thousands of 64-core AMD processors. This collaboration indicates a complex relationship between the two competitors and suggests that the battle for AI chip contracts may be more competitive than it seems.

While AMD stock has seen substantial growth, it’s important to consider the company’s valuation. AMD is not cheap (but then again, not many stocks in the space are).

Despite AI mania and momentum, I’m leery about a trade here. The company is subject to the cyclical swings of the semiconductor industry, demand fluctuations for computer end-products, and strong competition from Intel (NASDAQ:INTC). Moreover, potential challenges in its data center business could also impact AMD’s performance. For instance, slower industry spending on data-center CPUs as customers allocate more dollars toward GPUs sold by Nvidia could affect AMD’s prospects.

Amid valuation risks, AMD has several strengths that make it a compelling investment. Firstly, the company’s impressive pipeline of products, including the 4-nanometer Bergamo in the second half of the year and the 3-nanometer Turin in 2024, should support higher revenue.

Secondly, AMD’s strong balance sheet provides a solid financial foundation. The company is also expected to have sharply improving free cash flow, estimated to be more than $5.5 billion in 2024.

Lastly, AMD’s potential in the AI market, fostered by its partnership with Microsoft (NASDAQ:MSFT), could drive significant growth in the coming years.

Pros and Cons to AMD Stock Now

AMD presents a compelling case for investment, given its robust growth prospects in the AI market and healthy financial position. However, the company’s high valuation and the inherent risks associated with the semiconductor industry make it a potentially risky investment.

Bottom line? I think it’s worth paying attention to AMD here, but any kind of exogenous shock or credit event would bring down momentum overall in equities. Valuations across the market are also high. If I’m right about an impending credit event, the entire industry could get slammed.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.