Where Will AMD Stock Be in 3 Years?

Over the past year, shares of Advanced Micro Devices (AMD) have dropped by 53%. This decline contrasts sharply with its rival Nvidia (NASDAQ: NVDA), which has seen an increase of 25% during the same period. This raises an important question: is the drop in AMD's stock price a chance to buy is an opportunity or a warning for investors to step back? Let’s explore what the future may hold for AMD in the next three years.

A Natural AI Winner

The introduction of OpenAI's ChatGPT in late 2022 sparked significant excitement in both Wall Street and Silicon Valley. Analysts from McKinsey estimate that this new technology could contribute between $2.6 trillion and $4.4 trillion to the global economy by enhancing and replacing human labor. Companies are scrambling to acquire generative AI hardware to keep pace with this rapid growth.

AMD is positioned to capitalize on this trend. Similar to Nvidia, AMD designs AI accelerator chips essential for training and operating large language models (LLMs). Although Nvidia currently dominates the market with a share ranging from 70% to 95%, the expanding market provides room for various players, including AMD, to secure their own share.

Even as an underdog, AMD has several strategies to effectively compete. Companies are cautious about relying too heavily on Nvidia for their AI hardware needs, as this dependency could lead to issues such as shortages or unfavorable pricing. Nvidia's flagship Blackwell chips are sold at a hefty price of $30,000 to $40,000 per unit, creating a permissible space for AMD to offer more competitive pricing.

Moreover, AMD provides an open-source software platform called ROCm, designed to rival Nvidia's CUDA and assist developers in programming their AMD hardware for AI tasks.

Strong Operational Momentum

The AI boom is already showing positive effects on AMD's business. In the fourth quarter, AMD's revenue surged 24% to $7.7 billion, which may seem modest. However, the company's data center segment, which manages AI chip sales, grew impressively by 69% to $3.9 billion, making up 51% of total sales. Unlike Nvidia, which derives around 90% of its revenue from its data center segment, AMD’s operations are more diversified, incorporating CPUs and various types of PC and laptop hardware.

While the non-AI segments may currently be hindering AMD's overall growth rate, they offer diversification. This could make AMD less vulnerable to a potential downturn in AI hardware demand, which poses increasing risks to the industry.

In February, Microsoft’s CEO Satya Nadella raised concerns when he stated that generative AI has yet to generate significant value. Reports indicated that Microsoft has even canceled some leases for new U.S. data centers, suggesting plans to reduce investments in AI-related projects. Furthermore, the emergence of DeepSeek—a project that trained a competitive LLM using older GPU chips—indicates that companies might not need the latest hardware to remain competitive.

Where Will AMD Stock Be in Three Years?

Currently, AMD has a forward price-to-earnings (P/E) ratio of just 22, making its shares appear undervalued, especially when considering its diversified portfolio and access to the rapidly expanding generative AI sector. For comparison, the Nasdaq-100 has a forward estimate of 26, while market leader Nvidia is trading at a P/E of 25.

However, it is essential to note that there are no guarantees AMD will experience market-beating growth over the next three years. The generative AI space remains speculative and largely unprofitable. Early signs indicate that major players like Microsoft might be scaling back their AI investments. For now, AMD stock may be best viewed as a hold, pending further insights into market conditions.

AMD, Nvidia, AI