Advanced Micro Devices (AMD +1.63%) became a favorite on Wall Street last year when a boom in artificial intelligence (AI) highlighted the massive potential of its business. Its stock climbed 87% since last March and has shown no signs of slowing, rising 22% since the start of 2024.
The launch of OpenAI's ChatGPT reinvigorated interest in AI and caused countless tech companies to restructure their businesses to prioritize the developing market. Increased demand for AI services also boosted graphics processing unit (GPU) sales because the chips are crucial for training AI models.
AMD was slightly late to the AI party last year while its rival, Nvidia, got a head start in AI chips. However, AMD is investing heavily in the industry and could see big gains from its efforts in the coming years.
So, here are four reasons to buy AMD stock like there's no tomorrow.
1. AMD has massive potential in AI
Data from Grand View Research shows the AI market hit close to $200 billion last year and is projected to expand at a compound annual growth rate of 37% through 2030. The trajectory will see the industry reach nearly $2 trillion by the end of the decade.
With Nvidia's meteoric rise last year it achieved an estimated 90% market share in AI GPUs, putting companies like AMD on the back foot. However, AMD is gearing up to challenge the chipmaker this year.
Last December, AMD unveiled its new MI300X AI GPU. The chip was designed to compete directly with Nvidia's offerings and has already caught the attention of some of tech's most prominent players, with Microsoft and Meta Platforms signing on as clients.
2. Seeking to dominate its own area of AI
AMD's earnings have yet to reflect its heavy investment in AI. However, the company's recent quarterly earnings suggest it's moving in the right direction. In its fourth quarter of 2023, AMD's revenue rose 10% year over year to $6 billion, beating analysts' expectations by about $60 million. The company's AI-focused data center segment posted 38% revenue growth.
NASDAQ: AMD
Key Data Points
In addition to AI chips, AMD is diversifying its position in the market by expanding into AI-powered personal computers. According to research firm IDC, PC shipments are projected to receive a major boost this year, with AI integration serving as a key catalyst.
And a Canalys report predicts that 60% of all PCs shipped in 2027 will be AI-enabled.
If AMD can corner the market on AI PCs, it could see a significant revenue boost as the industry develops and demand rises.
3. Improvements in the PC market
In addition to AI growth, AMD is profiting from an improving PC market. Spikes in inflation prompted steep declines in PC sales, with shipments dipping 16% in 2022 and continuing to fall for most of 2023. However, recent reports indicate the market is finally showing signs of recovery.
Data from Gartner shows PC shipments popped 0.3% in the fourth quarter of 2023, marking the first increase in more than a year. Market improvements are reflected in AMD's sales, with its PC-centered client segment reporting a 62% rise in revenue in Q4 2023.
AMD is on a promising growth trajectory, benefitting from the development of AI and the PC market.
4. Potentially more room left to run than Nvidia
Thanks to its stellar growth in 2023, Nvidia became the first chipmaker to reach a market cap above $1 trillion. While the significant potential of AI indicates Nvidia still has plenty of room left for growth, AMD could offer new investors bigger gains over the long term.
Earnings per share estimates seem to support this.
Data by YCharts
This chart shows AMD's earnings could hit $7 per share over the next two fiscal years, while Nvidia's may reach nearly $36 per share. On the surface, Nvidia looks like the clear winner. However, multiplying these figures by the companies' forward price-to-earnings ratios (AMD's 49 and Nvidia's 38) yields stock prices of $345 for AMD and $1,353 for Nvidia.
According to these projections, AMD's stock could rise by 92% by fiscal 2026 and Nvidia's could increase by 43%. Nvidia's growth is promising. However, AMD's is too good to pass up. AMD might be at an earlier stage of its AI journey, but that could mean it has more room for growth.
