Advanced Micro Devices (AMD +0.31%) has been ahead of the curve in terms of the AI sell-off trend. The chip stock peaked in March 2024 and has trended lower ever since, and is now down by around 50% from its all-time high.
However, numerous Wall Street analysts have much higher price targets on AMD, suggesting that it could be a screaming buy here. Hans Mosesmann of Rosenblatt Securities has the highest price target on Wall Street for AMD stock at $225. With AMD shares hovering around $100, that indicates a potential 12-month upside of around 125%.
Any investor would be happy with that kind of return, but is it realistic to expect?
AMD isn't the leader in any particular industry
AMD has always produced great hardware, but it never seems to be the leader when it matters most. In the early 2000s, Intel was the top dog in the processor space, while AMD was only allowed to stick around because Intel didn't want to be broken up for being a monopoly. History has repeated itself in the AI chip race, where Nvidia is dominating the incredibly important data center market.
In Q4, AMD's data center division generated $3.9 billion in revenue, up 69% year over year. However, Nvidia continued to eat AMD's lunch. In its fiscal 2025 fourth quarter, which ended Jan. 26, its data center revenue grew by 93% to $35.6 billion. So, not only is AMD's data center division much smaller than Nvidia's, but it's also growing at a slower rate. That's not a winning combination, and is a big reason why AMD's stock has been such a poor performer recently.
NASDAQ: AMD
Key Data Points
The core of the investment thesis for AMD in early 2024 was that onlookers expected that it would start to gain some ground on Nvidia throughout the year as the largest AI chip buyers started to focus more on hardware geared toward inference rather than training. However, that trend didn't emerge, and Nvidia also didn't lose any ground on the inference front as it launched its new Blackwell architecture graphics processing units (GPUs).
Furthermore, AMD hasn't been doing great in its other markets. Its gaming revenue was down 59% year over year in Q4, while embedded process revenue decreased by 13%. Client revenue was a bright spot, up 58% year over year to $2.3 billion. However, the PC market isn't really growing in size, so that revenue stream will continue to be quite cyclical.
Still, despite AMD's somewhat disappointing Q4 results, its overall revenue grew by 24%, and profits rose by 42%. Most companies and their shareholders would be happy with those results, but because AMD hasn't been gaining ground on its key rival, the stock price has continued to sink.
This is where the new AMD investment thesis comes in, as it's starting to look like a value play.
AMD's stock appears to be fairly priced
AMD's stock isn't necessarily dirt cheap from a trailing earnings perspective. For a few recent quarters, the business wasn't optimized for earnings, so its trailing earnings multiple looks inflated. As a result, investors would be better served to use the forward price-to-earning (P/E) ratio to gauge the stock's valuation, as that metric is unaffected by the one-time events that skewed the trailing earnings metric.
AMD PE Ratio data by YCharts.
At 21.5 times forward earnings, AMD trades at a slight premium to the S&P 500, which is currently valued at 20.5 times forward earnings. Given that AMD is expected to grow its revenue by 23.4% and 20.7% in 2025 and 2026, respectively, that slight premium seems like a reasonable price to pay.
Could AMD stock rise by 125% in the next year, as Hans Mosesmann projects? I doubt it. That would give AMD a ridiculously high multiple for a company that is not a best-in-class provider. However, I think market-beating returns are certainly attainable from today's price, and investors willing to hold onto the stock for three to five years will likely beat the market if they take positions in the stock now.
