AMD (NASDAQ:AMD) has rallied 170% over the past 12 months, but that ride was a volatile one. I recently reviewed some of AMD's biggest weaknesses, noting that the underdog chipmaker's future depended heavily on landing some heavy blows against NVIDIA (NASDAQ:NVDA) and Intel (NASDAQ:INTC)

But today I'll take a more optimistic view on AMD, and see why its best days might still be ahead as it counters NVIDIA and Intel with new chips.

Rising stock charts rising out of a businessman's palm.

Source: Getty.

How AMD can challenge NVIDIA

AMD gained a temporary edge against NVIDIA in the GPU market when it launched its low to mid-range Polaris-based GPUs last year. But then NVIDIA struck back hard with new Pascal-based cards, which undercut AMD's cheapest cards and crushed them in the high-end market in terms of performance.

But looking ahead, AMD plans to launch its next-gen GPU, Vega, for mainstream consumers during the summer. Early benchmarks already indicate that the high-end Vega Frontier Edition, which was recently launched for enterprise customers, beats NVIDIA's Pascal-based Tesla P100 in deep learning capabilities. This indicates that AMD may enjoy an early lead against NVIDIA in the GPU market until its next-gen Volta chips arrive next year.

It's unclear how AMD's Vega will measure up against NVIDIA's Volta GPUs, but AMD is already reportedly developing "Vega 2.0" GPUs to counter Volta next year. If AMD can offer performance comparable to that of NVIDIA's Volta GPUs at lower prices, it could regain market share against NVIDIA in both mainstream gaming GPUs and high-end data center GPUs.

How AMD could hurt Intel

AMD also has plenty of ways to hurt Intel. Industry benchmarks already show that AMD's new Ryzen CPUs offer comparable performance to Intel's high-end Core i7 CPUs at much lower prices. Intel won't launch its next-gen chip architecture, the 10nm Cannonlake, until next year -- which could give AMD plenty of time to gain market share at its expense.

Rows of servers in a data center.

Source: Getty.

AMD is also targeting Intel's data center market with its Epyc chip, which challenges Intel's flagship Xeon chips for servers. Intel investors might scoff at the notion that AMD could dent Intel's 99% market share in servers, but Microsoft and Baidu both recently pledged to install Epyc chips in their data centers.

The reason is simple -- loosening Intel's iron grip on data center chips will encourage competition and drive down prices, thus reducing expenses for big data center operators. If other big tech companies decide to buy Epyc chips instead of Xeons, AMD could wound Intel's data center business, which is already struggling with sluggish demand.

Gaming consoles and virtual reality

One of AMD CEO Lisa Su's greatest accomplishments was the expansion of the company's EESC (Enterprise, Embedded, and Semi-Custom) business, which offset the slower growth of its Computing and Graphics business. The EESC business grew because it provided custom SoCs for the PS4 and Xbox One -- the two best-selling consoles of the current gaming generation.

Looking ahead, upgraded and refreshed versions of both consoles (the PS4 Pro, PS4 Slim, Xbox One X, Xbox One S) could boost sales of those SoCs, especially as sales of the original versions slow down. More demanding VR titles for the PSVR could also boost sales of the upgraded PS4 Pro.

Sony's PlayStation VR.

Sony's PlayStation VR. Source: Sony.

AMD stands to profit from the growing VR market in three different ways -- it could sell more VR ready GPUs for PCs, upgraded consoles for VR content, and SoCs for new stand-alone VR headsets. I previously warned investors not to put too much faith in these nascent markets, but they could strengthen AMD.

But curb your enthusiasm...

AMD's growth prospects look exciting, but investors should also be aware of the risks. Intel and NVIDIA have much deeper pockets for R&D and marketing, and AMD remains unprofitable. If push comes to shove, AMD needs to really impress mainstream and enterprise customers to remain ahead of both companies' next-gen chips.

Nonetheless, AMD looks reasonably valued at 2.7 times sales, which is lower than the industry average of 3.7 for semiconductor makers. I'd either keep an eye on AMD or possibly take a small position for now, but I definitely wouldn't go all-in on this stock or make it a core position in my portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.