With shares down 53% over the last 12 months, Advanced Micro Devices (AMD 3.46%) has fallen behind AI hardware leader Nvidia (NVDA 2.94%) which is up 25% over the same time frame. But is this discount a buying opportunity or a signal for investors to stay far away from the stock? Let's dig deeper to see what the next three years could have in store.
A natural AI winner
The launch of OpenAI's ChatGPT in late 2022 sparked a bonanza on Wall Street and Silicon Valley. Analysts at McKinsey projected the new technology could add a whopping $2.6 trillion to $4.4 trillion to the global economy by augmenting and replacing human labor. And companies rushed to buy generative AI hardware to avoid falling behind.
NASDAQ: AMD
Key Data Points
AMD was well positioned to benefit from this trend. Like its rival, Nvidia, the company creates AI accelerator chips that are used to train and run large language models (LLMs). And while Nvidia dominates the industry with an estimated market share of 70% to 95%, the pie is growing so fast that there is room for many companies to get a slice.
Despite being a clear underdog, AMD has several angles to compete in the hardware opportunity. For starters, companies will be wary about allowing their AI supply chains to become overly dependent on Nvidia because this puts them at risk of shortages or unfavorable pricing. Nvidia's flagship Blackwell chips cost between $30,000 and $40,000 per unit, presenting a good opportunity for AMD to undercut its rival.
The company also offers an open-source software platform called ROCm, which is designed to compete with Nvidia's CUDA by helping developers program their AMD hardware for AI applications.
Strong operational momentum
The AI opportunity is having a clear impact on AMD's business. Fourth-quarter revenue jumped 24% to $7.7 billion, which sounds modest. However, the company's data center segment (which handles sales of AI chips) grew by a much more impressive 69% to $3.9 billion, or 51% of total sales. Unlike Nvidia, which earns around 90% of its revenue from its data center segment, AMD remains very diversified into other opportunities, such as CPUs and other types of PC and laptop hardware.
While non-AI-related businesses are dragging down AMD's combined top-line growth rate right now, they provide diversification, which could make the company much less vulnerable to a potential slowdown in demand for AI hardware, which is a growing risk for the industry.
Image source: Getty Images.
In February, Microsoft's CEO Satya Nadella alarmed many by admitting that generative AI hasn't created much value so far. Microsoft has reportedly also canceled some leases for new U.S. data centers, which might be a sign that it is planning to scale back AI-related capital expenditures. Furthermore, the emergence of DeepSeek, which trained a competitive LLM on older, less advanced GPU chips, suggests that companies might not need the latest hardware to stay relevant.
Where will AMD stock be in three years?
With a forward price-to-earnings (P/E) ratio of just 22, AMD's shares look undervalued -- especially considering its diversification and exposure to the fast-growing generative AI opportunity. For context, the Nasdaq-100 boasts a forward estimate of 26, while AI industry leader Nvidia trades for 25.
With that said, there is no guarantee that AMD will post market-beating growth over the next three years. Generative AI remains speculative and largely unprofitable. And there are early signs that big players like Microsoft may be reducing their involvement. AMD stock looks like a hold until more information becomes available.
