Semiconductor stocks have been in fine form on the stock market over the past five years, which is evident from the 205% gains clocked by the PHLX Semiconductor Sector index during this period. These terrific gains can be attributed to the growing demand for chips across multiple sectors ranging from automotive to data centers to computers to smartphones.
The impressive surge in the semiconductor sector has rubbed off positively on Advanced Micro Devices (AMD -1.04%) as well. Shares of the chipmaker have risen a terrific 308% in the past five years, comfortably outperforming the sector's growth. Of course, 2024 has turned out to be a forgettable year for AMD investors, as its shares have remained flat so far.
But it won't be surprising to see the stock regain its mojo and deliver impressive growth over the next five years. Let's look at the reasons why.
Secular growth is going to be a tailwind for AMD
The global semiconductor industry generated an estimated $439 billion in revenue in 2020, according to the Semiconductor Industry Association (SIA). The industry is expected to finish 2024 with revenue of $611 billion. That would translate into a four-year compound annual growth rate (CAGR) of 8.6%.
The good part is that the global semiconductor market is forecast to clock a stronger annual growth rate of just over 10% for the next five years, generating almost $981 billion in annual revenue in 2029. This faster growth is set to be driven by the growing need for chips required to power artificial intelligence (AI) applications.
From data centers to smartphones to personal computers (PCs), AI is set to drive a robust increase in chip consumption in the coming years. Market research firm Omdia estimates that sales of AI chips deployed in data centers could hit $151 billion in 2029, compared to an estimated $78 billion in 2024. On the other hand, sales of AI-enabled PCs are expected to hit $231 billion in 2030, compared to $50.6 billion this year.
The rapid growth of both these markets is going to be a huge tailwind for AMD. That's because the chipmaker serves both the data center and personal computer markets with its central processing units (CPUs) and graphics processing units (GPUs), which explains why the company saw robust growth in the previous quarter.
For instance, AMD delivered record data center revenue of $3.5 billion in the third quarter of 2024, up 122% from the same quarter last year. The segment benefited from the growing demand for both server CPUs and GPUs that are being deployed in AI servers. It's worth noting that AMD is now expecting to sell at least $5 billion worth of data center GPUs in 2024, which is a significant upgrade over its original expectation of $2 billion at the beginning of the year.
Given that AMD's data center GPU revenue started ramping up in the fourth quarter of 2023, when it sold $400 million worth of AI GPUs following the launch of its MI300 family of accelerators, the revenue run rate that the company is clocking from this business in 2024 shows a remarkable jump. The huge addressable opportunity present in the AI chip market suggests that AMD could continue to witness robust growth in this segment over the next five years, especially since it sells both AI-focused GPUs and CPUs.
On the other hand, AMD's client processor business is also gaining traction thanks to the improving prospects of the PC market. The company recorded a 29% year-over-year increase in its client segment revenue to $1.9 billion in the third quarter. AMD management creditedthis impressive increase to the strong demand for its latest generation of processors based on the Zen 5 architecture.
The company has designedits latest processors so that they can run AI workloads locally on laptops and desktops. The good part is that AMD's AI-centric PC platforms are gaining traction. On its latest earnings conference call, AMD CEO Lisa Su remarked:
HP and Lenovo are on track to more than triple the number of Ryzen AI Pro platforms they offer in 2024, and we expect to have more than 100 Ryzen AI Pro commercial platforms in market next year, positioning us well for share gains as businesses refresh the hundreds of millions of Windows 10 PCs that will no longer receive Microsoft technical support starting in 2025.
We have already seen that the AI PC market is set to clock outstanding growth over the next five years. So, AMD's client processor business should ideally be able to sustain its healthy growth levels going forward and contribute to the company's robust bottom-line growth.
Strong earnings growth could lead to impressive stock upside
Analysts are expecting AMD to conclude 2024 with $3.33 per share in earnings, which would be a 26% jump from last year's reading. As the following chart tells us, the chipmaker is expected to clock much stronger earnings growth over the next couple of years.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
Consensus estimates are projecting AMD's earnings to increase at an annual rate of almost 33% over the next five years. Based on its 2024 earnings per share estimate of $3.33 per share, the company's bottom line could increase to $13.86 per share after five years. AMD has a five-year average forward earnings multiple of 33, which is a slight premium to the Nasdaq-100 index's forward earnings multiple of 30 (using the index as a proxy for tech stocks).
Assuming it trades in line with the Nasdaq-100 index's forward earnings multiple after five years and achieves $13.86 per share in earnings, its stock price could be worth $416 at that time. That would be a jump of 180% from current levels, indicating that AMD stock could continue to remain a top investment over the next five years as well.
That's why investors would do well to look beyond AMD's flat performance in 2024 and consider buying this semiconductor stock, thanks to the potential upside it could deliver in the long run.
