Advanced Micro Devices (AMD -8.91%) has been a top performer on the stock market over the past seven years, turning an investment of just $1,000 into more than $12,500 as of this writing, thanks mainly to the company's market share gains in the client and server central processing unit (CPU) markets against Intel.
The launch of AMD's Epyc series of server processors in 2018 and the release of the Ryzen personal computer (PC) processors in early 2017 at aggressive price points have played a key role in powering AMD's revenue and earnings growth over the years by allowing it to take share away from Intel. The stock's impressive rise over the past seven years has brought its market cap to $191 billion from just $9 billion at the end of December 2016.
In other words, AMD's market cap jumped over 20x during this period. It is worth noting that AMD's market cap grew at a faster pace than its stock price in the past seven years thanks to an increase in the number of outstanding shares, which may happen if the company issues more shares, executes a stock split, or there is redemption of stock options by employees.
This suggests that the market rewarded AMD for its growth over the years despite the dilution that an increase in the number of outstanding shares brings (stock splits don't lead to dilution, however, and AMD last split its stock in the year 2000). Can AMD sustain its impressive stock market run through the end of the decade and hit a trillion-dollar valuation (assuming the number of outstanding shares remains constant)? Let's explore more about AMD.
AMD needs to step on the gas to hit a $1 trillion valuation by 2030
AMD was a relatively smaller company in 2016 than it is right now. It generated $4.27 billion in revenue for that year, along with a net loss of $117 million. In 2022, AMD delivered non-GAAP (adjusted) net income of $3.4 billion, along with $23.6 billion in revenue. This tells us that AMD grew impressively over the years. But 2023 has been a difficult year for the company on account of weak demand for PCs and tepid spending by enterprise customers on its data center processors.
Analysts forecast a 4% drop in AMD's top line this year to $22.7 billion. Its adjusted earnings are anticipated to drop to $2.65 per share from $3.50 per share last year. AMD, therefore, will have to clock significantly stronger growth if it is to reach a $1 trillion valuation. The good part, however, is that AMD's growth is anticipated to accelerate from 2024.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
There are a few reasons why analysts expect an uptick in the company's pace of growth. First, the PC market should see some recovery in 2024, and it could keep getting better from there when the support for Windows 10 ends in 2025, which could trigger sales of new PCs. IDC estimates that the global PC market could clock 3.1% annual growth through 2027.
However, there are a couple of growth hotspots within the PC market that could help supercharge AMD. The first is the growing demand for gaming PCs. Grand View Research estimates that the gaming PC market could grow at an annual pace of almost 13% through the end of the decade, generating $130 billion in revenue in 2030.
Meanwhile, the market for artificial intelligence (AI)-powered PCs is expected to grow at an impressive annual rate of 50% through 2030, according to Counterpoint Research. These fast-growing opportunities could be key in powering the growth of AMD's client business, which regained its mojo last quarter with a 42% year-over-year increase in revenue to $1.5 billion.
AMD management says that the inventory correction in the PC market is over, and demand has started returning. Even better, AMD continues to claw away share from Intel in the PC market. Mercury Research estimates that AMD's share of the client processor market (which includes CPUs deployed in both desktops and laptops) increased 4.4 percentage points in the third quarter to 19.4%.
This also means that the company still has a lot of room to grow by capturing more market share, which should help sustain the recent turnaround in its client revenue.
Another area where AMD has been gaining rapidly against Intel is the server processor market. AMD's share of server processors increased an impressive 5.8 percentage points year over year in the third quarter to 23.3%, driven by the growing adoption of its server CPUs by cloud service providers. The global server processor market is expected to generate $175 billion in revenue in 2030, which means that AMD's top line could grow substantially if it continues to capture a bigger piece of this market.
Also, AMD's foray into the market for AI processors is going to unlock a $150 billion revenue opportunity by 2027, according to CEO Lisa Su. Given that AMD has already started building a revenue pipeline with the help of its AI chips, this is yet another sizable opportunity that could help the chipmaker deliver impressive growth in the long run.
Where will AMD be in 2030?
At its financial analyst day presentation in 2022, AMD management said that it expects to clock a long-term annual revenue growth rate of 20%. Of course, the company's performance has been nowhere near this level in 2023, but it cannot be ignored that AMD's revenue increased at a compound annual growth rate (CAGR) of 52% from 2020 to 2022.
Also, AMD's growth has started accelerating, and the long-term opportunities suggest that it could indeed maintain a healthy pace of growth through the end of the decade. Assuming AMD's revenue does clock a 20% CAGR through 2030, its top line could increase to $81 billion at the end of the forecast period (using its estimated revenue of $22.6 billion in 2023 as the base).
Multiplying the projected revenue of $81 billion in 2030 with AMD's five-year average sales multiple of almost 8 points toward a market cap of almost $650 billion at the end of the decade. While that would fall short of the $1 trillion milestone, investors shouldn't forget that AMD could deliver 240% gains over the next seven years even if it hits a $650 billion market cap.
Also, it may even hit the $1 trillion mark if the market rewards it with a higher price-to-sales multiple thanks to new catalysts such as AI. In all, AMD could turn out to be a solid growth stock in the long run even if it doesn't become a $1 trillion company, which is why investors can consider buying it before its turnaround begins next year.
