AMD (AMD -0.04%) isn't a bad company by any means, but if there was ever a company that could fit the saying, "always a bridesmaid and never the bride," it would be AMD. AMD always seems to be in second place, regardless of the trend. In the early 2000s, AMD was getting smoked by Intel (NASDAQ: INTC) in the CPU game during the massive PC buildout, and it was said that AMD was only allowed to exist so Intel wouldn't be accused of being an illegal monopoly.
Fast-forward to today, and the biggest computing trend to ever occur, the AI arms race, also has AMD playing second fiddle to another competitor, Nvidia (NASDAQ: NVDA). However, AMD is still doing OK in this trend, but its market share is nowhere near Nvidia's.
Still, if the market has priced AMD's stock at a level reflecting its second-place status, it could be worth owning. Despite its trailing position, will it be a winning investment over the next three years? Let's find out.
Image source: Getty Images.
AMD's business is a mixed bag of results
AMD hasn't fared as well in the AI arms race because of how broad a company it is. While Nvidia has all its resources focused on designing the best graphics processing units (GPUs) possible, AMD is more stretched across multiple categories.
AMD now splits its business segment into three units (previously, it was four):
- Data center, which includes various hardware pieces necessary to operate a data center. This segment is most involved with the AI arms race.
- Client and Gaming, which includes CPUs and GPUs used in commercial computers and for assembling PCs. These two units used to be separate but have since been combined to match the data center segment's relative size.
- Embedded, which was acquired through AMD's purchase of Xilinx. This segment makes purpose-built components that can find their way onto many hardware applications.
Of these three divisions, the data center is performing the best, although its embedded division has an excellent operating margin.
| Division | Q1 Revenue | YOY Revenue Growth | Q1 Operating Margin |
|---|---|---|---|
| Data Center | $3.7 Billion | 57% | 25% |
| Client and Gaming | $2.9 Billion | 28% | 17% |
| Embedded | $0.8 Billion | (3%) | 40% |
Data source: AMD. YOY = Year over Year.
While that's a bit of a mixed bag of results, considering how much larger the data center, client, and gaming divisions are than the embedded division, AMD's overall growth rate fared quite well, with revenue increasing 36% year over year. However, that growth rate isn't expected to last, with Wall Street analysts projecting 27% revenue growth in Q2 and 23% for 2025.
For AMD to prove itself a worthy investment option, it needs to maintain its growth outperformance, but it seems to be trending in the wrong direction. Even looking out into 2026, it projects the same thing, with 17% revenue growth.
However, revenue isn't all investors should look at, especially with a mature business like AMD.
If AMD improves its margins, it could be a massive winner
AMD's margins have been under fire for the last few years, but that seems to be turning around.
AMD Profit Margin data by YCharts
AMD's margins are quickly ticking up, and Wall Street is anticipating this. As a result, they expect strong earnings growth over the next few years, with the average analyst projecting $5.71 in earnings per share (EPS) for 2026, up from the $1.38 it has posted over the past 12 months.
So, when valuing AMD's stock, investors need to consider this expansion rather than looking at trailing price-to-earnings (P/E) metrics (AMD trades for an expensive 81 times trailing earnings).
Currently, AMD trades for about 28 times forward earnings, which seems a bit expensive.
AMD PE Ratio (Forward) data by YCharts
However, if you value AMD from FY 2026 projected earnings ($5.71), it trades for 19.3 times forward earnings. This margin expansion goal is high on CEO Lisa Su's priority list and could propel AMD's stock to outperform over the next three years.
AMD isn't going to outgrow or deliver better GPUs than Nvidia. Still, if it can work toward expanding its profit margin and is successful, it could be an incredibly successful investment and dramatically outperform many of its peers (including Nvidia).
