With its shares more than doubling in 2023, Advanced Micro Devices (AMD +3.50%) has been a rewarding near-term investment. While the company's operational results are yet to match its impressive stock price performance, that could soon change.
Let's discuss what the next five years could have in store for this legendary tech company as it pivots to new growth opportunities in artificial intelligence (AI).
What is Advanced Micro Devices?
Since its founding in 1969, Advanced Micro Devices has specialized in creating computer hardware such as memory chips and central processing units (CPUs). After the 2006 acquisition of ATI Technologies, the company became a direct rival of Nvidia in the market for graphics processing units (GPUs), a type of technology with uses ranging from video game rendering to training advanced generative AI models.
NASDAQ: AMD
Key Data Points
While Nvidia is widely considered to have the leading edge in the GPU market, AMD traditionally competes based on price and value for money.
This strategy has served the company well in the personal computer graphics industry. And AMD could employ a similar strategy to gain market share in AI chips -- a market where Nvidia currently controls 80% of sales volume.
Management has high hopes for the future
The AI chip market is ripe for competition. According to CNN, demand is outstripping supply for the most advanced AI chips, leading to bottlenecks and spiraling costs as more companies race to build and train generative AI models. With a third-quarter gross margin of 74% (up 20.4 points from the prior-year period), Nvidia is taking full advantage of its dominant position to keep prices high.
Image source: Getty Images.
AMD plans to disrupt Nvidia's near-monopoly with its MI300x family of data center chips designed to match or exceed the Nvidia h100 in training and running AI platforms. These new products had a limited impact on AMD's third-quarter revenue, which only grew 4% year over year to $5.8 billion.
But investors should expect data center chip sales to ramp up in 2024 as the company begins to deliver the products to clients like Microsoft and Meta Platforms, which have already committed to buying them.
AMD's CEO Lisa Su expects the size of the AI chip industry to grow almost tenfold to more than $400 billion over the next four years. And this means the company could enjoy plenty of long-term growth, even if the opportunity lives up to just a fraction of those lofty projections.
AMD will have to grow into its valuation
To be fair, AMD's valuation looks high compared to its current performance. With a price-to-sales multiple of 10.22, its shares are significantly pricier than the S&P 500 average of 2.6. And this is a big premium for a company that only grew by single digits in its most recent quarter.
That said, investing is all about the future, not the past. And AMD could be on the cusp of spectacular growth over the next half-decade as it scales up its new AI chip business. The stock looks like a buy.
