Advanced micro devices (NASDAQ: AMD) The shares have returned 441% over the past five years, largely driven by market share gains Intel in central processing units (CPUs). The company’s opportunity to sell graphics processing units (GPUs) to data centers could be even bigger and support another big run for shareholders in the next decade.
Demand for artificial intelligence (AI) hardware has already increased Nvidia supply to the stratosphere. Here’s why AMD could be next.
1. A $400 billion opportunity
AMD is at the beginning of a tsunami wave in data center spending. Data centers need a lot of GPUs to handle the AI workload. AMD CEO Lisa Su has said the market for so-called AI accelerators could reach $400 billion by 2027. It’s a huge figure next to AMD’s forecast for $3.5 billion in data center GPU revenue this year.
Increasing customer deployments of its Instinct GPUs and robust demand for Epyc server chips drove double-digit growth in the data center segment in the fourth quarter of 2023. Management said the new MI300 accelerators will be the fastest revenue-accelerating product in the market company will be. history.
Microsoft already uses the Instinct MI300X accelerators for its Azure cloud services business, while Facebook owns Metaplatforms uses the chip for AI inference and to optimize its Llama 2 large language models.
Analysts expect sales to rise 14% in 2024 before accelerating to 26% in 2025. But the real story is what this growth could do for AMD’s bottom line, or earnings per share.
2. Growing data center revenues will deliver record profits
Nvidia has been the star of the show in the AI chip market so far. The demand for expensive data center GPUs allows the company to achieve incredibly high margins, which is unusual in the semiconductor industry.
AMD may not see a 48% profit margin like Nvidia, but with its profit margin currently in the single-digit range, there is a huge upside to its profitability. The market is underestimating future earnings growth as data center GPU sales begin to increase.
In the near term, AMD is targeting a small increase in gross profit margin, driven by expected sales of its data center chips and Ryzen CPUs. Over the long term, the Wall Street consensus estimate has AMD growing earnings at an annualized rate of 42%.
3. The stock could double again
Analysts currently predict that AMD’s earnings will reach $7.26 by 2026. Assuming the stock is still trading at a price-to-earnings ratio of 40, the stock would be priced at $290, or nearly double the current share price of $150.
Given Su’s success at AMD since 2014, investors should not underestimate the company’s ability to exceed expectations. AMD lagged far behind Intel in CPUs a decade ago, but outpaced the market leader and gained significant market share. Earlier this year, Su called the transition to AI a unique opportunity, and the company is clearly positioning itself for another major growth spurt.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short January 2026 $405 calls to Microsoft, and short May 2024 $47 calls to Intel. The Motley Fool has a disclosure policy.
3 Reasons to Buy Advanced Micro Device Stocks Like There’s No Tomorrow was originally published by The Motley Fool
