With its shares up by an impressive 285% over the previous five years, Advanced Micro Devices (AMD 3.52%) has made for a solid long-term investment. And while the iconic chipmaker faces near-term cyclical challenges in the central processing unit (CPU) market, a pivot to artificial intelligence (AI) hardware could unlock the next leg of long-term growth.
Let's explore how the company could perform over the next half-decade.
What is Advanced Micro Devices?
California-based AMD has long been a tech hardware leader, focusing on CPUs, a key computer component designed to run operating systems and installed software. Historically, this has been a lucrative industry for AMD as megatrends like the internet and workplace modernization drove demand for laptops and personal computers. But the market has matured -- just as near-term challenges mount.
NASDAQ: AMD
Key Data Points
Second-quarter revenue fell 18% year over year to $5.4 billion after a 54% collapse in AMD's client segment, which involves the sale of laptop and PC processors to consumer-facing manufacturers. With inflation and elevated interest rates, customers are putting off buying these big-ticket ticket discretionary items or turning to cheaper options. That said, this is a cyclical challenge, not a permanent one.
Analysts at consulting company Gartner expect the PC industry to return to growth next year. Over the next five years, AMD's client segment could return to being a stable and reliable source of revenue while the company turns to new growth drivers like data center chips and generative AI.
Unlocking the next leg of long-term growth
Generative AI is a subset of artificial intelligence where computer systems create new content. Analysts at Bloomberg expect this market to be worth $1.3 trillion by 2032, driven, in part, by rising demand for the training infrastructure needed to create these complex applications. While the opportunity is currently dominated by the industry leader Nvidia (which boasts a market share of 80% in AI chips), AMD is stepping into the ring with its own powerful AI hardware.
Image source: Getty Images.
In June, AMD announced a new chip called the M1300X, its most cutting-edge AI-focused graphics processing unit (GPU). Initially designed to help render computer graphics, GPUs excel at computing multiple tasks simultaneously, an ability that has made them integral for training generative AI models on vast amounts of data.
AMD's M1300X outperforms Nvidia's flagship H100 in terms of memory, with a maximum capacity of 192 GB compared to 120 GB. But with general manufacturing starting in the fourth quarter of this year, it is later to market than its rival, which expects to ship 550,000 H100 chips in 2023 alone. That said, demand for AI chips outstrips supply, so there is plenty of room for AMD in the market, even if Nvidia maintains its lead.
How will the shares perform?
AMD's future looks bright. Over the next five years, investors can expect the company to benefit from a cyclical recovery in the PC and laptop market while scaling up its enterprise GPU business as demand for generative AI training surges. From a valuation perspective, the shares still trade at a reasonable 25 times forward earnings, which is in line with the S&P 500 average.
