Where will AMD stock be in 3 years?

The last three years have been complicated for Advanced microdevices (AMD 1.12%) investors. The chipmaker’s stock remained under pressure due to weakness in the personal computer (PC) market; at the same time, tough competition from the rival Nvidia in the gaming and data center graphics card segments also dampened investor confidence in the stock.

As it turns out, AMD stock has gained 44% over the past three years, underperforming PHLX Semiconductor Sector the index gains 56%. However, it won’t be surprising if the company’s fortunes turn around in the next three years.

The PC recovery has created a big tailwind for AMD

PC shipments will fall nearly 14% in 2023, according to IDC, after a 16.6% decline in 2022. However, the PC market has started to recover in recent quarters. IDC reports that the PC market grew 3% year-over-year in the second quarter, after growing 1.5% in Q1. This recovery is likely to become stronger in the future due to the growing buzz around artificial intelligence (AI) computing.

IDC estimates that annual shipments of AI PCs could grow from 50 million units in 2024 to 167 million units in 2027. This could pave the way for solid growth in AMD’s client processor business, where it gained ground over Intel.

According to Mercury Research, AMD’s share of the desktop CPU (central processing unit) market rose to 23% in the second quarter from 19.4% in the same period last year. The share of notebook CPUs increased to 20.3% in Q2, from 16.5% in the year-ago period. This market share improvement and global PC volume growth drove AMD’s customer revenue up 49% year-over-year to $1.5 billion in the second quarter.

CEO Lisa Su believes the company is “well positioned for continued revenue share growth based on the strength of our leadership portfolio and design earnings momentum.” If AMD continues to gain a larger share of the PC CPU market over the next three years, it could see healthy growth in its customer segment.

The data center market presents another lucrative opportunity

AMD’s data center business has historically been led by its Epyc processors, which compete with Intel’s offerings. As it did in the client CPU market, AMD ate away at Intel’s dominant position in the server CPU space. It controlled 24.1 percent of the server CPU market in the second quarter, up from 18.6 percent in the same quarter last year.

AMD management estimates that there will be a total addressable market (TAM) of $42 billion in server processors over the long term. The company ended 2023 with data center revenue of $6.5 billion, most of which came from server processor sales. Specifically, AMD launched the MI300 line of graphics processing units (GPUs) for data centers last December, and this product line generated more than $400 million in revenue in the fourth quarter.

So it can be estimated that AMD sold around $6 billion worth of server CPUs last year. Given the size of the addressable opportunity and AMD’s growing influence in this space, it won’t be surprising to see the company’s data center CPU revenue improve considerably going forward. But more importantly, the sharp acceleration that the company anticipates in sales of data center GPUs this year will take this segment’s growth into a higher gear.

We’ve already seen that AMD sold about $400 million worth of data center GPUs in Q4 2023, which was the quarter it launched its MI300 AI accelerators. The chipmaker expects its data center GPU revenue to top $4.5 billion in 2024, which would be a more than 10-fold jump from the previous year.

This suggests that AMD is consolidating its position as the second largest player in the data center GPU market, behind Nvidia. That’s not a bad place to be, given that AMD expects the data center AI accelerator market to reach $400 billion in revenue by 2027. This additional catalyst for AMD should ideally give them give it a major boost and supercharge its growth over the next three years.

Smart acquisitions will strengthen its AI prospects

AMD has taken steps to ensure it becomes a key player in the AI ​​market. These include several key acquisitions that have been announced over the past two months.

In August, AMD completed its acquisition of Silo AI in a deal valued at $665 million. It will now aim to provide customers with end-to-end AI solutions thanks to Silo AI’s expertise in developing large language models (LLM). In simpler words, AMD is taking steps to become a complete provider of AI solutions, including software, instead of simply focusing on hardware manufacturing.

This is a smart thing to do given the massive opportunities in the AI ​​software market. And now, AMD has decided to spend $4.9 billion to buy ZT Systems, a company known for designing and manufacturing servers and storage systems. ZT Systems will become part of AMD’s data center business when the deal closes in the first half of next year.

AMD plans to divest ZT’s server manufacturing division, which seems like a good move considering the low-margin nature of this business. But while retaining ZT’s design capabilities, AMD plans to offer complete AI server solutions that include Instinct AI GPUs, Epyc server processors, and networking products, rather than just selling individual components.

So AMD plans to become a one-stop shop for companies looking to deploy AI server systems. This strategy could reap rich rewards in the long term, given that Nvidia sells complete server rack systems for up to $3.8 million, depending on configuration, and is seeing solid demand for its end-to-end systems -end because of their faster and smaller computing abilities. operating costs.

AMD EPS estimates for current fiscal year data by YCharts.

Ultimately, it can be concluded that AMD is banking on stronger growth engines for the next three years. Not surprisingly, analysts expect a sharp acceleration in its earnings from 2023 levels of $2.65 per share.

Based on the company’s 2026 revenue forecast, the bottom line will grow at a compound annual rate of 40% over the next three years. So investors looking to add an AI stock to their portfolios would do well to buy AMD, as it looks poised for stronger gains than it has delivered over the past three years.