The proliferation of artificial intelligence (AI) has given many stocks a big lift in the past year, and the technology is still in its early phases and is expected to grow rapidly in the long run.
In 2024, for instance, the spending on generative AI applications is predicted to double, according to market research firm IDC. And generative AI spending is forecast to increase 86% annually through 2027. Companies that can take advantage of this could see their revenue and earnings jump.
Advanced Micro Devices (NASDAQ: AMD) is one such company that could benefit from AI’s growth in multiple niches. Let’s see how this technology could supercharge AMD’s stock over the next three years.
A closer look at AMD’s AI-focused catalysts
AMD’s stock is already on a bull run — gaining 88% in the past six months — thanks to the growth of its AI chip business. But there are doubts about the stock’s ability to sustain its momentum considering its expensive valuation.
It now trades at 62 times forward earnings, which makes it expensive when compared to peer Nvidia (trading at 35 times forward earnings), which dominates the AI chip market and is growing significantly faster.
This probably explains why AMD stock has been retreating in recent sessions, with certain Wall Street analysts believing that it is priced for perfection. But it could regain its mojo because a closer look at its key business segments indicates that it is on track to take advantage of AI adoption in more ways than one.
AMD’s revenue from sales of personal computer (PC) processors shot up 62% year over year in the fourth quarter of 2023 to $1.5 billion — a stark difference from the segment’s full-year revenue decline of 25%. Management said that the improving demand for its Ryzen central processing units (CPUs) was the reason behind the terrific jump last quarter.
The improving CPU sales can be attributed to the overall recovery in the PC market. And a closer look shows that the demand for AI-enabled PCs is playing a central role in this recovery. According to Gartner, 54.5 million AI PCs could be sold in 2024, accounting for 22% of the overall market. That’s a big jump from last year, when AI PCs accounted for 10% of the nearly 242 million units shipped.
With the market for PCs that are AI-enabled set to more than double in 2024, AMD has already targeted this opportunity with new Ryzen processors that come integrated with an additional AI processor. CEO Lisa Su said on the January earnings conference call, “Millions of AI PCs powered by Ryzen processors have shipped to date, and Ryzen CPUs power more than 90% of AI-enabled PCs currently in [the] market.”
As a result, AMD’s client processor revenue could witness robust growth in 2024. At the same time, its data center business is also stepping on the gas. The segment’s revenue was up 38% year over year in the fourth quarter to $2.3 billion, thanks to the growing demand for the company’s Instinct data center accelerators. The segment generated $6.5 billion in revenue for the full year, and it seems on track to grow substantially in 2024.
AMD now forecasts more than $3.5 billion in revenue this year from sales of data center graphics processing units (GPUs), up from the earlier estimate of $2 billion.
The company generated $400 million from sales of data center GPUs last quarter. And since this business is in the early phases of ramping up, there’s a good chance that the segment will produce a significant increase in revenue.
Management says it has additional capacity to support the upside in demand. Analysts expect AMD to sell $4 billion to $8 billion in AI GPUs. The company could get close to the higher end of that range with some help from its foundry partner, which is looking to increase its output of AI chips.
How much upside can investors expect?
AMD expects almost $26 billion in revenue this year, an improvement from 2023, when its top line fell 4% to $22.7 billion. More importantly, analysts predict revenue will increase even faster in 2025, followed by another year of double-digit growth in 2026.
The stock currently has a price-to-sales ratio of almost 14, which is expensive when compared to its five-year average sales multiple of 7.4. But its forward sales multiple of 10 is closer to the five-year average and points toward an improvement in its top line. So, if AMD manages to hit $40 billion in sales in 2026 and trades at 10 times sales at that time, its market cap could increase to $400 billion.
That would be a 30% jump from current levels. But the company’s AI-powered growth could lead the market to reward it with a higher sales multiple, as we have seen with other AI stocks. So, there is a possibility of AMD delivering much stronger gains over the next three years.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
Where Will AMD Stock Be in 3 Years? was originally published by The Motley Fool
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