So far in 2022, Advanced Micro Devices (AMD -0.77%) investors have taken it on the chin with the stock for the chipmaker down roughly 47%. But recent stock price action suggests the year could end on a positive note with some level of recovery.

Share prices of AMD are up about 36% in the past month, bringing some relief to investors who witnessed a brutal sell-off for most of the year. But will AMD be able to sustain this recovery momentum for the remainder of 2022 and into the new year? Let's take a closer look and see if we can find the answer.

Why AMD stock could fly in 2023

The data center business was a bright spot for AMD this year, helping the company mitigate the negative impact of a weak personal computer (PC) market. Sales of data center chips produced $4.4 billion in revenue for AMD in the first nine months of 2022, up 74% from the same period last year. The segment's revenue increased 45% year over year in the recently reported third quarter to $1.6 billion, driven by market share gains in the server processor space.

The strong showing from the data center business helped AMD finish Q3 with a 29% increase in revenue to $5.6 billion, even though revenue from sales of desktop and notebook processors declined a whopping 40% year over year to $1 billion, thanks to a soft PC market. Mercury Research estimates that AMD gained server processor market share for the 14th consecutive quarter in Q3. Its share reportedly increased 7.3 percentage points year over year to 17.5% last quarter.

It won't be surprising to see AMD sustain its server growth momentum in 2023, driven by the launch of its latest generation Epyc processors this month. The chipmaker is promising that its fourth-generation Epyc processors can deliver a 2.8 times increase in performance and a 54% reduction in power consumption over the prior generation.

More importantly, AMD's new processors have already been chosen for deployment by major cloud service providers such as Alphabet's Google, Microsoft, and Oracle. Also, server OEMs (original equipment manufacturers) such as Supermicro, Lenovo, and Dell will be making systems powered by AMD's latest chips.

Earlier this year, Bank of America estimated that AMD's server market share could hit 35%. The pace at which AMD gained server share last quarter, along with Intel's (INTC 0.24%) delays in bringing the next generation of its server processors to market could pave the way for AMD to substantially increase its share once again in 2023.

It is also worth noting that while AMD's data center revenue increased by around $1.9 billion in the first nine months of 2022 to $4.4 billion, Intel's data center revenue dropped to $14.9 billion over the same period. Chipzilla generated $16.2 billion in data center revenue during the same period in 2021. So, Intel's loss was AMD's gain, and a similar situation is likely to unfold in 2023 as AMD seems in a position to take more business from its bigger rival.

Another reason why AMD stock could step on the gas next year is because of an increase in the production of gaming consoles. Sony, which uses AMD's semi-custom processors in the PlayStation 5 console, aims to ship 30 million units in fiscal 2023 (which will end in March 2024). That would be a 64% jump from its estimate of 18.5 million units in fiscal 2022.

Meanwhile, Microsoft's Xbox console shipments are expected to jump to 30 million units in 2023, up 42% from this year's estimate of 21 million. This bodes well for AMD as Microsoft is also using AMD's chips in its latest consoles. Throw in the company's solid growth and prospects in the embedded business that produced $1.3 billion in revenue last quarter, an increase of 1,549% over the prior year thanks to the acquisition of Xilinx, and it is evident that a majority of AMD's business is built for growth.

The gaming, data center, and embedded businesses produced 82% of AMD's revenue last quarter. So, there are multiple reasons why AMD stock could fly higher in 2023.

Why the stock could fall

There are two reasons why AMD's misfortune could continue in the new year.

The first is the continued weakness in the PC market that could keep the company's client processor business under pressure. Market research firm IDC forecasts that PC sales are on track to drop 12.8% this year, which explains why AMD is experiencing weak sales of desktop and notebook processors. The market isn't expected to recover in 2023, with IDC estimating that the combined sales of tablets and PCs could drop 2.6% next year.

The second reason why AMD's latest rally could be under threat in 2023 is because of its rich valuation. AMD stock trades at 44 times trailing earnings, which is rich when compared to the Nasdaq-100 index's multiple of 24. Richly valued stocks were hammered this year amid surging inflation that led the Federal Reserve to aggressively hike interest rates. A similar trend in 2023 could spell bad news for AMD.

What should investors do?

The reasons why AMD stock could fly higher in 2023 outweigh the reasons why it could fall, which is why investors who hold this tech stock in their portfolios should continue doing so since it seems capable of sustaining its momentum.

That being said, the stock remains richly valued and a small sign of weakness in the company's growth story could send its shares tumbling. However, that could open an opportunity for savvy investors to buy shares of AMD given that it is built for long-term growth on account of the multiple catalysts that it is sitting on.