Advanced Micro Devices (AMD +5.15%) is quite upbeat about the prospects of its data center business over the next three to five years, and that's not surprising. The company's artificial intelligence (AI) accelerator chips are set to be deployed in large volumes by numerous AI companies and hyperscalers.
It has deals in place with OpenAI and Meta Platforms to deploy several gigawatts (GW) of its AI data center chips, which should open a multibillion-dollar growth opportunity for the chip designer. Management estimates that its data center business could clock more than 60% annualized revenue growth for the next three to five years.
However, there's another potent catalyst that has driven significant revenue and earnings growth for AMD in the past, and it's about to return in a big way.
Image source: The Motley Fool.
AMD's semi-custom business should get a major boost thanks to a new generation of gaming consoles
Microsoft (MSFT 3.90%) and Sony (SONY +1.57%) have long relied on AMD to design semi-custom chips for their gaming consoles. Citing a couple of AMD executives, a July 2024 report from Tom's Hardware points out that AMD avoided bankruptcy back in the 2010s thanks to strong sales of its PlayStation 4 processor.
NASDAQ: AMD
Key Data Points
AMD was in dire straits around 15 years ago, deep in debt and struggling to grow revenue. However, the arrival of the PS4 and Microsoft's Xbox One (which was also powered by an AMD semi-custom chip) in November 2013 gave the chip designer a major shot in the arm. While its overall revenue was down 2% in 2013, its graphics and visual solutions business (which included sales of semi-custom processors) saw a 55% jump in annual revenue to $2.19 billion.
AMD credited this solid performance to increased semi-custom revenue. Management pointed out that its semi-custom and embedded processor business accounted for 30% of its total revenue in the third and fourth quarters of 2013. AMD returned to revenue growth the following year, fueled by a 51% jump in revenue from the enterprise, embedded, and semi-custom (EESC) segment.
Cut to the end of 2020, and the launch of the next-generation PS5 and Xbox consoles in November that year gave the semi-custom business another big boost. AMD's EESC revenue jumped by 65% during the year to $3.33 billion, outpacing the 45% growth in its overall revenue. What's more, the segment's revenue more than doubled the following year to $7.1 billion as more consumers upgraded to the latest consoles.
AMD has reclassified its business segments since then, and it now includes its semi-custom business within the client and gaming segment. The company reported $3.9 billion in gaming revenue last year, an increase of 51% over the previous year, fueled by strong demand for its semi-custom processors and gaming graphics cards.
AMD's gaming business should start clocking stronger growth from next year as Sony and Microsoft are reportedly going to launch their next-generation consoles during the 2027 holiday period, per leaks and supply chain information. Their launches should trigger a major upgrade cycle as the current console models will be almost seven years old by then.
The good news for AMD investors is that it has already been locked in by both companies to supply semi-custom processors for their next consoles. Investors would do well to note that the PS5 and Xbox Series X and Series S have sold a combined 120 million units over the past five years.
So, AMD has a major catalyst in the bag that could complement the outstanding growth of its data center business, potentially setting the company up for stronger-than-expected long-term growth.
The stock is already primed for remarkable gains over the next five years
AMD's non-GAAP (adjusted) earnings came in at $4.17 per share in 2025. In its November analyst day presentation, the company said that it expects to achieve earnings per share of more than $20 over the next three to five years. That would translate to an annualized growth rate of almost 37% over five years, which is quite impressive.
Additional growth drivers, such as the semi-custom business, could help it do better than that. But even if it achieves only $20 in earnings per share after five years and trades at 33 times earnings at that time (in line with the tech-laden Nasdaq-100 index's earnings multiple), AMD stock could jump to $660.
That's more than double its current price. However, don't be surprised to see this semiconductor stock jump higher than that, driven by the catalyst of a video game console business that could lead the market to reward it with a premium valuation.
