There is just no stopping Advanced Micro Devices (AMD +2.13%) right now. Shares of the semiconductor specialist have soared by more than 300% over the past 12 months (as of writing) and recently hit a fresh all-time high. For investors worried they may have missed the boat, here's the good news: There are solid reasons to remain bullish on AMD's outlook, and the stock may still deliver market-beating returns over the medium term. Here is why.
Image source: The Motley Fool.
Accelerating demand
AMD's financial results have been strong. In the first quarter, the company's revenue increased by 38% year over year to $10.3 billion. The tech leader's data center segment grew even faster, posting sales of $5.8 billion, up 57% year over year. On the bottom line, AMD's adjusted earnings per share climbed 43% year over year to $1.37. The company did all that while slightly improving its gross and operating margins. The business is booming.
However, the market is even more excited about what's coming. AMD could ride the next wave of the artificial intelligence (AI) industry even more than it did the first. While AMD is a notable player in the GPU (Graphics Processing Unit) market, it is far behind the leader in this niche, Nvidia (NVDA +3.90%). But AMD has a much larger share of the CPU (Central Processing Unit) market. As the AI industry shifts from training to inference, demand for CPUs will soar.
Notably, the rise of agentic AI will be a major tailwind for AMD. AI agents are complex, autonomous systems that can accomplish tasks and work toward goals with limited human involvement. As AMD argues, agentic AI systems require a full stack of CPUs to function properly. As a result, although during the first phase of the AI revolution GPUs were in much higher demand, the CPU-to-GPU ratio will now move closer to 1:1, according to AMD, versus the previous 1:4 or 1:8.
This is great news for AMD, as its EPYC processors are among the market leaders. Meanwhile, the company has gained share in the server CPU market in recent quarters. All of this suggests that AMD's financial results may improve, and it could continue beating the market over the next few years.
NASDAQ: AMD
Key Data Points
There are some risks
Although AMD's prospects look strong, it's worth considering several potential pitfalls. First, AMD is not the only CPU giant that is looking to tap into the soaring demand. The company's longtime rival, Intel (INTC 2.47%), is doing the same. There is also Nvidia which is launching its Vera CPU, specifically to take on the agentic AI revolution. Nvidia may be a formidable competitor, as the Vera CPU is designed as part of an integrated AI computing platform that includes the Rubin GPU.
Since Nvidia remains the runaway leader in GPUs, many companies may choose its CPUs, which are better suited to work with its GPUs. Second, there is always the possibility that the agentic AI boom won't live up to expectations. Nvidia estimates a $200 billion total addressable market for CPUs thanks to agentic AI. AMD projected a compound annual growth rate (CAGR) of more than 35% through 2030, and a total market worth over $120 billion by then. If this demand falls short of expectations, AMD's top-line growth will slow, and the company's shares may decline significantly.
Third, AMD's shares don't exactly look cheap after its run. The company is currently trading at 73.5x forward earnings, compared to an average of 22.2x for information technology stocks. At current levels, the stock may drop sharply at the first sign of trouble. So, should investors still invest in AMD? My view is that it looks attractive even with these caveats. AMD's recent market share gains show that it can thrive despite the competition in an industry that can accommodate multiple winners.
Further, CPU demand has risen so rapidly that AMD's recent 35% CAGR estimate through 2030 is almost double the company's projection six months earlier. Finally, AMD's valuation could become more reasonable as growth accelerates. In fact, the company's forward price/earnings-to-growth ratio -- which accounts for expected earnings growth -- is 1.2. The "undervalued" range typically starts below "1," but AMD's shares don't look drastically overvalued by this metric. And the stock is worth a premium anyway, considering what may lie ahead. In short, AMD's shares are still worth investing in.
