Where Will AMD Stock Be in 3 Years?

Over the past year, shares of Advanced Micro Devices (AMD) have seen a significant drop, declining by 53%. In contrast, its competitor in the AI hardware market, Nvidia (NASDAQ: NVDA), has experienced a 25% increase during the same timeframe. This begs the question: is AMD's current low stock price a reason to invest or a sign to steer clear? Let's explore the future outlook for AMD over the next three years.

A natural AI winner

The introduction of OpenAI's ChatGPT in late 2022 created a major stir across financial markets and tech industries. According to analysts at McKinsey, this innovative technology has the potential to boost the global economy by an impressive $2.6 trillion to $4.4 trillion by enhancing and replacing human labor. As a result, businesses are rushing to purchase generative AI hardware to stay competitive.

AMD is strategically positioned to leverage this trend. Similar to Nvidia, the company manufactures AI accelerator chips that are essential for training and operating large language models (LLMs). Although Nvidia currently holds a significant market share estimated between 70% to 95%, the growing demand for AI hardware presents opportunities for other companies, including AMD.

While AMD is considered the underdog, several strategies are in place for the company to compete effectively. For one, organizations may hesitate to rely solely on Nvidia for AI hardware, as this can lead to supply chain vulnerabilities or high costs. Nvidia's leading Blackwell chips are priced between $30,000 and $40,000 each, giving AMD a chance to offer more competitive and affordable options.

Additionally, AMD has developed an open-source software platform called ROCm, which competes with Nvidia's CUDA. This platform assists developers in programming AMD hardware for various AI applications, further enhancing its competitiveness.

Strong operational momentum

The surge in AI demand is noticeably impacting AMD's business performance. In the fourth quarter, the company's revenue rose by 24% to $7.7 billion. Although this seems modest, it’s important to note that the data center segment, which includes AI chip sales, surged by an impressive 69% to $3.9 billion, accounting for 51% of total sales. Unlike Nvidia, which is heavily reliant on its data center for around 90% of its revenue, AMD is diversified across several sectors, including CPUs and other PC and laptop hardware.

Even though parts of AMD's business not related to AI are currently slowing its overall growth rate, this diversification can protect the company from a potential downturn in AI hardware demand, which poses a growing risk for the industry.

However, market speculation concerning the future of generative AI has started to raise eyebrows. In February, Microsoft CEO Satya Nadella expressed concerns about the current value generated from AI technologies, suggesting it has not yet met expectations. Reports indicate that Microsoft has even canceled some leases for new data centers in the U.S., hinting that they might reduce their focus on AI-related investments. Additionally, the development of DeepSeek, which managed to train a competitive LLM using older GPU chips, implies that not all companies will need the cutting-edge hardware to remain competitive.

Where will AMD stock be in three years?

Currently, AMD's forward price-to-earnings (P/E) ratio stands at 22, indicating that shares might be undervalued. This is particularly noteworthy given AMD's diversified business model and its involvement in the burgeoning generative AI sector. For comparison, the Nasdaq-100 boasts a forward estimate of 26, while industry leader Nvidia trades at a P/E of 25.

Nevertheless, it's crucial to recognize that there's no guarantee AMD will achieve significant growth over the next three years. Generative AI is still largely speculative and has not proven to be uniformly profitable. Furthermore, early indicators suggest that major players like Microsoft may be dialing back their AI initiatives. For now, AMD stock may be best regarded as a hold until more clarity emerges regarding its future prospects.

AMD, Nvidia, AI