Advanced Micro Devices (AMD 4.15%) has played second fiddle to Nvidia in artificial intelligence (AI). While the chipmaker (AMD for short) has great products, they don't stand up to what Nvidia has to offer. However, it has been improving its lineup, including its controlling software, a gap that allowed Nvidia to pull ahead in the first place.
Although AMD won't be able to catch Nvidia in market cap, it can still become a large and dominant company. Its market cap currently hovers around $360 billion, so its stock needs to just about triple to reach the $1 trillion threshold. But can it do it by 2028?
Image source: AMD.
AMD is less concentrated than Nvidia
One characteristic that has held AMD back versus Nvidia is its diversification. Its product lineup is wider than Nvidia's, including nearly everything Nvidia is doing, plus central processing units for original equipment manufacturers, embedded processors, and a wider variety of data center equipment. For some investors, this diversification is a bonus because it won't be affected like Nvidia would be if AI infrastructure spending were shut off.
During Nvidia's fiscal 2026 third quarter (ending Oct. 26), $51.2 billion of the company's $57 billion in revenue came from data center equipment. During AMD's third quarter, data center revenue made up $4.3 billion of its $9.3 billion total. So Nvidia is clearly more concentrated in data center revenue, which has been an excellent area over the past few years.
NASDAQ: AMD
Key Data Points
Looking ahead, it will still be a great area to invest in, and CEO Lisa Su believes that AMD will see explosive growth. Over the next five years, her company believes its data center revenue can have a greater than 60% compound annual growth rate (CAGR). That's far faster than its recent growth and would be unbelievable.
However, if it delivers on its projections, AMD will look a lot more like Nvidia in size, as the latter only projects a 10% CAGR in its client and gaming and its embedded processor divisions.
Overall, AMD expects its revenue CAGR to reach 35% for the next five years, combined with adjusted earnings per share of greater than $20. Those are tall targets, but the company has developed the technology to stay competitive in this realm. However, will it be enough to push it across the $1 trillion threshold by 2028?
It will be a few more years before AMD reaches a $1 trillion market cap
Over the past 12 months, AMD has generated $32 billion in revenue. At a 35% CAGR, that would indicate its revenue would be about $84.9 billion by 2028.
Another management projection is that its adjusted operating margin would be greater than 35%, which would be a huge uptick from the current 10%. If AMD can reach that level by 2028 -- after factoring in a 21% tax rate plus a decrease the margin by a few percentage points to account for the switch from adjusted figures to the number under generally accepted accounting principles -- that would give the company an estimated profit margin of 25%. At $84.9 billion in revenue, that would convert to $21.2 billion in profits. Now, we need to assign an earnings multiple to this projected profit level.
Currently, the stock trades at over 110 times earnings, which isn't a realistic valuation. Instead, I'll use a slight discount from Nvidia's current price (53 times earnings). If AMD traded for 40 times earnings, it would be valued at $848 billion, just short of the $1 trillion threshold we are looking for.
If you make a tweak and assume the growth rate will be a little faster in the early years of the five-year projection or give it a high valuation, AMD could be a $1 trillion company by 2028.
However, I think it's a safe bet that it will get there by 2030. Any stock that can nearly triple in under five years is a fantastic investment, and if AMD can hit its projections, it will be a must-own stock over the next five years.
