One of the most interesting stocks in the artificial intelligence (AI) space is AMD (AMD +1.71%). Its technology isn't as good as that of its chief rival in the graphics processing unit (GPU) business, Nvidia (NVDA +1.73%). However, it is making some advancements, and its AI accelerators could come to be more widely viewed as viable alternatives to the market leader's wares, especially if Nvidia charges too high a premium for its latest platforms.
We'll get some additional clarity on the direction AMD is moving on Feb. 3, when it reports its fourth-quarter results and provides its 2026 outlook. Management has already outlined what it sees as its five-year growth track, and that forecast is quite impressive. But if the company looks like it's on course to meet those expectations, the stock could soar following the report.
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AMD's results haven't been that spectacular
It's impossible to talk about AMD without comparing it to Nvidia. AMD takes a more diversified approach to the chip design business: Its sales are split roughly 50-50 between its data center segment (which is where nearly all AI spending is going) and its non-data center segment. While revenue diversification may be considered a good thing under many circumstances, when the tech world is in the middle of a once-in-a-generation boom of computing infrastructure spending, it's better to be highly leveraged toward that trend. Nvidia has taken that to the extreme: About 90% of its revenue comes from data centers.
Furthermore, data center spending is expected to grow through at least 2030. AMD also believes in this trend, and it projects its data center division will grow at an outstanding 60% compounded annual rate through 2030. However, AMD has a long way to go to turn that projection into a reality.
NASDAQ: AMD
Key Data Points
In Q3, AMD's data center revenue growth was 22% year over year. That's not even close to what AMD expects to deliver over the next five years.
What to look for going forward
With that in mind, I'll be looking for some strong statements from management regarding its 2026 outlook and the potential for a reacceleration from the data center division. If management provides upbeat guidance, I have no doubt the stock will soar. But if it is a bit hesitant to give 2026 guidance similar to its five-year outlook, the market may start to look at AMD with suspicion.
Right now, AMD stock trades at a premium valuation of 40 times expected 2026 earnings. That's a significantly higher forward P/E than most AI hyperscalers, and also higher than Nvidia, which trades at 24 times its expected earnings for its fiscal 2027, which ends in January 2027.
AMD will need to justify that premium through strong growth and expanding margins. It hasn't done so of late, but management believes that the company is ready to turn the corner. We'll see on Feb. 3 if the prior projections pan out. If they do, investors should be ready for the stock to soar.
