Will Advanced Micro Devices Shares Reach $200 by 2025?
Advanced Micro Devices (AMD)'s shares saw a meteoric rise at the dawn of 2024, reaching unprecedented heights. However, the company's diverse business operations led to a slump, causing the shares to plunge by 44% since that peak, at the time of writing. The descent, however, could present a golden opportunity for investors. While the stock appears pricey with a 112x multiplier based on trailing 12-month earnings per share, the P/E ratio diminishes significantly when considering future earnings projections.
The surging demand for data center chips is driving remarkable revenue growth and enhancing profit margins, potentially propelling AMD's stock back towards the $200 mark by 2025.
Data Center Dominance
Data center chip sales account for the majority of AMD's revenue, raking in $3.5 billion in the last quarter, marking a 122% rise year-over-year. This substantial growth compensated for the sluggish demand witnessed in the embedded and gaming segments. AMD's overall revenue soared 18% year-over-year during the third quarter, showing a significant improvement from the previous quarter's 9% increase.
AMD and Nvidia share a stronghold in the Graphics Processing Unit (GPU) market. Despite AMD's lag behind Nvidia for years, the immense demand for GPUs essential for training Artificial Intelligence (AI) models is driving robust growth for both firms.
The premium GPUs sold to data center clients yield substantial profits, driving an impressive 31% increase in adjusted earnings (non-GAAP) during Q3. For the entire year, analysts anticipate AMD to log 27% revenue growth and a 25% profit increase, according to Yahoo! Finance.
The forecast for enhanced profit margins looks optimistic. Alongside data center growth, margins should further improve as the rest of the business recuperates from its slump. AMD's embedded business, which is experiencing a surge in demand from prominent aerospace customers like SpaceX, is expected to enhance the company's profitability.
Where is AMD's Stock Headed in a Year?
The principal hurdle obstructing AMD's progress is supply chain issues. Nvidia has demonstrated unparalleled efficiency in fulfilling the demand for advanced GPUs, which have been in short supply. However, AMD should be well-equipped to meet this challenge. Despite the steep competition, AMD reported higher revenue and elevated its full-year revenue estimate for data center GPUs during the tight supply scenario.
"As we scale the company next year, you can see we're going to benefit from the economics of scale to continue improving our operational efficiency and gross margin," stated CFO Jean Hu during the Q3 earnings call.
Analysts predict a 54% jump in AMD's earnings in 2025, reaching $5.11.
At present, the stock hovers around $125, translating to 24x multiples based on 2025 earnings projections. This presents an attractive proposition for a renowned chip supplier growing at double-digit rates. To attain the $200 benchmark, it would require a forward P/E ratio of 40 based on 2025 earnings estimates. This is feasible, given that the stock is currently trading at 38 times 2024 estimates.
I maintain that AMD's stock can hit the $200 mark within the next year or so, provided all segments experience a revenue surge again by the end of the year. However, it's crucial to invest with a long-term perspective, keeping in mind the possibility of a market downturn that could impact all stocks.
Even if AMD faces a temporary setback in its growth trajectory in the near future, the company's management has identified a $400 billion potential market for data center chips. The recent downturn could turn out to be a strategically beneficial buying opportunity, not merely for 2025, but for several years to come.
In light of the company's strong position in the data center market and anticipated revenue growth, investors may consider it a viable opportunity for capital allocation in the finance sector, specifically in the context of investing in AMD's stocks. With the potential for enhanced profit margins and the management's vision of tapping into a $400 billion market for data center chips, AMD's stock price could indeed surpass the $200 mark in the future, despite temporary market fluctuations.
