Shares of Advanced Micro Devices (AMD 2.71%) have surged 81% over the last three months. For shareholders, the stock's rebound is encouraging following the underperformance in 2024, while its larger rival Nvidia outperformed.
Nvidia has dominated the market for data center chips. AMD has seen strong growth for its MI300 series of graphics processing units (GPUs) for data centers, but it's got a lot of work to do if it's going to catch the leader.
Wall Street is betting on AMD to show strong earnings growth over the next year as it continues to expand its data center offering. Despite Nvidia's commanding lead, both stocks are currently trading at the same forward price-to-earnings (P/E) multiple of about 39 in the last week of July.
To justify more highs for AMD shares, investors are going to want to closely monitor its data center growth, as this is the key catalyst for AMD to expand its margins, grow earnings, and deliver more gains for shareholders.
Let's look at AMD's strategy to tackle this multibillion-dollar opportunity, and how it could benefit the stock over the next few years.
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AMD's data center growth
AMD estimates the data center market for artificial intelligence (AI) accelerators to exceed $500 billion by 2028. This represents annualized growth of more than 60%, driven by the shift in AI workloads from training to inference, where computer models are smart enough to make predictions from new data in real time.
One glaring issue for AMD is that Nvidia already provides just about everything needed to build AI factories, including software, networking, and hardware, and that has made Nvidia the preferred choice for AI researchers. On a trailing-12-month basis, Nvidia's data center revenue doubled to more than $131 billion. By comparison, AMD's trailing data center revenue grew 84% year over year to $13.9 billion.
Nvidia holds a large share of the data center market, but it doesn't control 100% of it. There's growing demand for cost-effective alternatives to counter the steep prices of Nvidia's chips. Even though Nvidia has led the GPU market for 20 years, AMD has delivered incredible returns to shareholders by offering GPUs with a better cost-performance ratio.
AMD is starting to put together a differentiated set of chip solutions for data centers. Its acquisition of Xilinx a few years ago brought over industry-leading field programmable gate arrays (FPGAs) that can be customized for specialized workloads in data centers, such as network security and medical research. Amazon has been a major buyer of AMD's FPGAs for its cloud business.
AMD has made investments to widen its offering in recent years, which could start to pay off. The 2022 acquisition of Pensando Systems expanded its chip lineup to data processing units (DPUs), while its most recent acquisition of ZT Systems brought in 1,200 skilled engineers to design more comprehensive computing systems for data centers. AMD clearly sees an opportunity to grow its data center business significantly in the coming years, and if successful, it could send the stock soaring.
Will AMD keep up with Nvidia?
AMD is making the strategic moves to position itself for growth, but investors shouldn't take anything for granted.
Nvidia's data center business has expanded more rapidly than AMD, and this is creating a widening gap between the two companies' data center segments. In 2023, Nvidia's data center revenue was more than 7 times larger than AMD's, and today, Nvidia is nearly 10 times bigger.
However, AMD is the only alternative to Nvidia in the GPU market. AMD's business with Amazon and other data center operators put it in a solid position for more growth, and the best part is that AMD is currently generating much lower margins than other semiconductor companies. It stands to significantly expand margins as it ramps up new chips for the data center market.
Analysts expect AMD's total revenue to reach $44 billion by 2027, with earnings per share growing 30% annually to reach $7.12, compared to 29% annualized earnings growth for Nvidia. That's enough earnings growth for the share price to double within the next three years.
The comparable earnings growth prospects are why investors are paying roughly the same forward P/E for both stocks right now. Nvidia is the leader and is growing its data center revenue faster, so AMD will have to execute in a highly competitive semiconductor industry. If AMD can meet analyst expectations, the stock offers significant upside over the next few years. Investors will want to closely watch its data center segment to justify its valuation.
