Advanced Micro Devices (NASDAQ:AMD) has had a remarkable run, with the stock price up over 500% over the last three years. Investors are bidding the stock higher due to AMD's market share gains against Intel (NASDAQ:INTC) in the server chip market.

While Intel recently announced further delays in producing its seven-nanometer server processors, AMD's Zen 2 "Rome" processors are running away with the market, with AMD already starting to look ahead to five-nanometer products. AMD's superb execution and prospects for further market share gains could justify a higher stock price, according to analysts' market share projections. 

A robotic arm in a manufacturing facility holding a computer processor.

Image source: Getty Images.

Analysts believe AMD's best days are ahead

During AMD's second-quarter conference call, CEO Lisa Su disclosed that the company had reached a double-digit market share of the server market, suggesting AMD is either at 10% or slightly above. 

However, a Jefferies analyst believes AMD is headed for between 30% to 50% market share within the next five years. That would translate to earnings between $4.50 and $6.50 per share, according to the analyst. The analyst raised the price target on the stock to $95, representing a current price-to-earnings (P/E) ratio between 14.6 to 21.1 based on projected earnings. 

Analysts at Cowen and Bank of America also raised their price targets on the shares to $100, which is about 30% above AMD's current share price. 

AMD reported growth in revenue of 26% for the second quarter, driven by demand for server chips. With Intel not expected to ship its seven-nanometer chips for at least a few years, AMD still has a lot of room to grow.

If AMD achieves earnings of $4.50 or higher within the next five years, based on Jefferies' estimates, a stock price of $100 is justified based on the implied P/E ratio. But for the stock price to climb even higher, AMD needs to sustain its growth and market share gains. Here is how AMD is planning on accomplishing that.

The technology curve is bending in AMD's favor

Intel has dominated the x86 central processing unit market for a long time, but between 2004 and 2006, AMD saw its share in server chips climb from 7% to 26%. When an analyst asked Su how AMD will reach those market share levels again, Su remarked that they are just getting started. 

"We've always said that the data center market is a bit of a journey, and so this is about putting together multiple generations of strong execution," she said. "I would say we're still in the early innings of what we believe we can do in the server market. I think Rome is a very, very competitive product."

When Su took over as CEO, she wanted AMD to succeed in the high-performance computing market, including data center. AMD has come a long way in achieving that objective in five short years.

Meanwhile, Intel is not expected to ship its first seven-nanometer product for data center until the first half of 2023. In the near term, Intel is accelerating production of its 10-nanometer chips. But the production of 10-nanometer is pressuring Intel's gross margin, which came in slightly below management's expectations last quarter at 55%. 

AMD reported a gross margin of 44% for the second quarter, and it's on the rise, up 330 basis points from the year-ago quarter due to strong demand for high-performance server processors. 

By the time Intel is up to speed on seven-nanometer, AMD will already be moving on to more advanced chips. AMD's Zen 3 Milan chips will start shipping later in 2020, while the Zen 4 five-nanometer chips are in development. 

Intel will fight back, but AMD is executing well on a long-term roadmap. It's very telling that Intel is now considering using more third-party foundries to maintain a better cadence of new products going forward. Intel has generally carried higher profit margins than AMD, because of its ability to design and manufacture its own chips. AMD outsources manufacturing to Taiwan Semiconductor Manufacturing, which has clearly out-executed Intel's own facilities. 

It's dangerous in investing to say this time is different, especially in the competitive semiconductor industry, but there are good reasons to believe that AMD's momentum is sustainable for at least the next few years.