Shares of Advanced Micro Devices (AMD 0.10%) surged to new highs at the beginning of 2024, but mixed business performance across the company's operating segments has weighed on the stock for most of the year. After reaching a high of $227, the shares are down 44% year to date at the time of writing.
The dip could be an excellent buying opportunity. While the stock's valuation looks expensive -- trading at 112 times trailing 12-month earnings per share -- the price-to-earnings (P/E) multiple is much lower when looking ahead to next year's earnings estimates. Strong demand for data center chips is not only driving strong revenue growth, but also driving higher margins, which could send the stock soaring back toward the $200 level in 2025.
Strong data center growth
AMD's chip sales to data centers are its largest revenue source, raking in $3.5 billion last quarter for a year-over-year increase of 122%. The triple-digit growth helped offset weak demand in the company's embedded and gaming segments. Overall, AMD's total revenue grew 18% year over year in the third quarter, up from the previous quarter's 9% increase.
AMD and Nvidia share a duopoly in the graphics processing unit (GPU) market. Although AMD has trailed Nvidia in the GPU market for many years, the insatiable demand for these chips used to train artificial intelligence (AI) models is fueling strong growth for both companies.
The advanced GPUs sold to data center customers generate above-average margins. This fueled even stronger growth in adjusted (non-GAAP) earnings, which grew 31% year over year in Q3. For the full year, the consensus analyst estimate expects AMD to report 27% growth in revenue with a 25% increase in earnings, according to Yahoo! Finance.
The outlook for improving margins looks very positive. In addition to data center growth, margins should also continue to improve once the rest of the business returns to growth. AMD's embedded business, where it's seeing strong demand from aerospace customers like SpaceX, is expected to benefit the company's profitability.
Where will AMD stock be in one year?
The main risk standing in the way of AMD's momentum would be supply chain problems. Nvidia has demonstrated incredible efficiency in meeting demand for advanced GPUs, which have been in short supply, but AMD should be up to the task. Despite the tight supply environment, AMD still reported higher revenue in Q3 and raised its full-year revenue guidance for data center GPUs.
"When we scale the company next year, you can see we're going to benefit from the economics of scale to continue to drive our operational efficiency to improve our gross margin," CFO Jean Hu said on the Q3 earnings call.
Analysts expect AMD's earnings to increase by 54% in 2025, reaching $5.11.
The stock currently trades at around $125, or 24 times next year's earnings estimate. That's very attractive for a leading chip supplier growing at high double-digit rates. To hit $200, it would need to trade at a forward P/E of 40 on 2025 earnings estimates. This is possible, as the stock is currently trading at 38 times 2024 estimates.
I believe AMD stock can reach $200 within the next year or so, especially if all segments are growing revenue again by later next year. Of course, there could always be another market sell-off that takes all stocks down with it, but that's why it's important to buy the shares with a long-term perspective.
Even if there's a hiccup in the company's momentum in the near term, management has previously identified a $400 billion addressable market for data center chips. The stock's recent dip could prove to be a timely buying opportunity -- not just for 2025, but for years to come.
