The generative artificial intelligence trend has been the main reason behind the strong performance of Advanced Micro Devices (NASDAQ:AMD) shares this year. Since January, AMD stock has rallied to the tune of 64.5%.
This rally looks relatively modest compared to the more than threefold move higher for Nvidia (NASDAQ:NVDA), AMD’s main rival (and so far clear winner in the AI chip arms race).
By those lights, I can see why some may believe AMD’s run-up is an example of investors going overboard. After all, this chip maker’s AI catalyst has yet to really play out.
That said, you may not want to jump to the conclusion that AI potential with Advanced Micro Devices is already accounted for in its valuation.
Taking a closer look, it’s clear that further progress in this area of tech could help drive additional spikes higher for the stock.
AMD Stock and AI
Nvidia is crushing it in AI chips. Controlling an estimated 80% of the market, AI already has a material impact on Nvidia’s operating performance.
With its early success, the company may have first mover advantage, which could be to the detriment of emerging competitors in this field, Advanced Micro Devices included.
Even if Nvidia remains the top dog, that doesn’t mean the further rise of AI will have limited impact on AMD’s operating performance, or on AMD stock, in the future. For instance, as CEO Lisa Su has stated, the market for AI server chips could hit $150 billion by 2027.
Even if Advanced Micro Devices captures a small bit of this market (say, 5-10%), with offerings like its upcoming MI300 AI accelerators, this could translate into tens of billions in additional revenue. Not too bad, given that AMD as a whole reported revenue of $23.6 billion last year.
Besides having a big impact on revenue, the AI mega-trend could have an even larger impact on earnings in the years ahead. Not only that, there’s something else in play that could provide a boost to the bottom line.
Back to All-Time Highs (and Beyond)
AMD stock has produced healthy gains for those who snagged shares when they hit multi-year lows last fall. Yet even as AMD has bounced back, it has still not re-hit or eclipsed its prior all-time high. The stock changes hands for around $105 per share today.
That’s around 35% below its high-water mark of $161.91 per share. Yes, excitement about AI stocks has calmed down in recent weeks. Getting back to all-time highs (and beyond) this year may be a tall order. However, for 2024, consider it a different story.
Why? Next year, analyst consensus calls earnings to grow by more than 50%, from $2.76 to $4.16 per share. The upper end of sell-side forecasts call for earnings topping $6 per share.
Forecasts also call for double-digit earnings growth to carry on into 2025. As hinted above, there’s something besides AI-related growth that could enable this to happen.
That would be a rebound in demand among AMD’s non-AI end users. Earnings in recent quarters have been depressed because of soft demand for PC and gaming chips, but this is likely to normalize over the next two years.
The Takeaway
Trading for 38.3 times forward earnings, AMD is not that much cheaper than NVDA, which trades for 41.5 times earnings.
However, if the aforementioned growth forecasts pan out, Advanced Micro Devices can likely sustain this valuation.
That bodes well for the company if it merely meets 2024 expectations. $4.16 per share at a 38.3 multiple gets shares within a few dollars of their all-time high.
If AMD hits the top end of 2024 earnings forecasts, reaching prices topping $200 per share could be within reach.
Taking all of this into account, there’s a clear takeaway here. With big upside (even if this company only becomes a distant second to the AI chip leader), if you’re bullish on the AI megatrend, feel free to consider entering an AMD stock position.
AMD stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place