There's a major shift underway in the semiconductor industry. Intel has fallen behind as large data center operators seek more powerful chips to run artificial intelligence (AI) models. This is benefiting one of the leading suppliers of graphics processing units (GPUs), Advanced Micro Devices (AMD -8.57%). While Intel stock has fallen 46% over the last five years, AMD shares have rocketed 166%.
The next wave of AI models will require exponentially more processing power than what is currently available, which is a huge opportunity for AMD. While it trails Nvidia in the GPU market, AMD has made strategic moves to position itself for long-term growth. Its data center revenue nearly doubled in 2024, and the stock's valuation is low enough to support substantial gains if it can maintain a steady pace of innovation.
NASDAQ: AMD
Key Data Points
Growth catalysts
AMD entered the data center GPU market in late 2023 with the launch of its Instinct MI300 accelerators. Demand for these chips helped grow its data center AI revenue to over $5 billion last year, or nearly 20% of its total revenue. The company's pending $4.9 billion acquisition of ZT Systems could be a game-changer for AMD's data center business.
The acquisition still has to receive regulatory approval, but ZT Systems could bolster AMD's offering of end-to-end solutions, including systems and software, for AI-optimized data centers. This will help narrow the gap with Nvidia's comprehensive solutions that include chips, networking, and software.
AMD also has attractive prospects in central processing units (CPUs) for consumer PCs. Strong demand for these chips boosted revenue in its client segment by 52% in 2024. AMD has positioned itself to benefit from a potentially strong upgrade cycle in the PC market, as Microsoft ends support for Windows 10.
The chipmaker enters 2025 with its innovation pipeline looking strong. It will launch the MI350 GPU for data centers this year, and it's already working on the MI400 that remains on track to launch in 2026. Meanwhile, its Ryzen AI processors for PC are optimized for Microsoft's Copilot AI assistant and could drive more growth for its client segment.
Why buy AMD stock?
AMD has great prospects in the data center and CPU market, but it still faces risks that have weighed on the stock's performance. The company has seen sharp revenue declines recently for chips used for video games and industrial markets, although these businesses make up a small amount of its total revenue.
But investors also can't underestimate Intel's ability to make a comeback. While AMD has gained significant share against the long-reigning CPU leader, Intel still controls the majority of the x86 CPU market. Intel also has greater resources to invest than AMD, as it spends over $16 billion a year on research and development compared to AMD's $6.5 billion.
Nvidia is still the leading supplier of computing systems for data centers, controlling between 70% to 90% share of the AI chip market. Its new Blackwell AI computing platform has already generated $11 billion in revenue.
However, there is no winner-take-all in the chip industry. AMD projects the AI chip market to be worth $400 billion by 2027. AMD is well-positioned to capture its share of the market, as shown by its recent data center growth.
Most importantly, the stock's valuation looks like a bargain. Analysts project the company's earnings to grow at an annualized rate of 28% over the next several years. With the stock trading at just 23 times this year's earnings estimate, AMD investors have a good chance of trouncing the market's average return over the next five years.
