Advanced micro-systems (AMD 0.02%) has generously rewarded investors over the past five years. Shares of the chipmaker jumped nearly 600%, largely on the company’s improved market share in the client and server processor markets.
However, AMD has had a tough time in recent months thanks to the large personal computer (PC) sales crash and weakness in the data center market due to weak demand from enterprise customers. Despite these headwinds, AMD stock has jumped 72% since the start of the year, indicating that investors still have confidence in the company’s ability to generate growth.
But can AMD overcome the headwinds it’s currently facing and get its mojo back? More importantly, does it make sense for current AMD shareholders to hang in there also anticipating solid gains over the next five years? Let’s find out.
AMD could benefit from new growth drivers over the next five years
AMD has experienced significant growth over the past five years. The company’s revenue at the end of 2017 was $5.3 billion. It ended 2022 with revenue of $23.6 billion, good for a compound annual growth rate of 35%. However, 2023 will likely be a down year for AMD, with the company expected to generate $23.0 billion in revenue thanks to the headwinds highlighted above.
PC sales are expected to drop in double digits this year, and AMD to have missed out the initial demand for graphics processing units (GPUs) needed to artificial intelligence (AI) apps, so the company’s short-term outlook doesn’t look too promising. However, AMD is expected to return to growth in fiscal 2024 and maintain that momentum in 2025.
Data by Y-Charts,
There are two main reasons why AMD should be able to stage a turnaround.
The first is the company’s embedded processor business. This segment generated record revenue of $1.56 billion in the first quarter of 2023, up significantly from $595 million a year earlier. It accounted for 29% of the company’s quarterly revenue. The impressive growth of this business was driven by AMD’s acquisition of Xilinx, which was completed in February 2022.
AMD says the acquisition gave it access to a huge addressable revenue opportunity worth $135 billion. Xilinx’s chip portfolio includes field-programmable gate arrays (FPGAs), adaptive system-on-chips (SoCs), data processing units (DPUs), and adaptive compute acceleration chips. The demand for these chips will grow rapidly due to their application in multiple industries such as data center, gaming, AI, wireless communications and automotive.
The FPGA market, for example, could grow at an annual rate of 15% through 2030. And the DPU market could grow at 27% annually through 2031, according to third-party estimates. Xilinx was a major player in the programmable chip market before its acquisition by AMD.
As such, the embedded business is poised to shake things up significantly for AMD over the next five years, given its influence on company revenue and the tremendous opportunity income it provides.
The second big opportunity that could drive AMD’s growth in the future is the data center business. This business generated $1.30 billion in revenue for AMD in the first quarter, and it was flat year-over-year as higher inventory levels in some data centers, customers have led them to reduce their orders. However, AMD sees a long-term total addressable market (TAM) worth $42 billion in the data center sector, which means there is still plenty of room for growth in this segment.
Even better, AMD gained ground against Intel in the server market at a good pace. The company ended 2022 with an estimated server market share of 15.6%, and that figure is expected to reach 20.5% this year. According to other estimates, AMD’s share of the server market could even climb beyond 30%. As the data center business is another key driver of AMD’s revenue, strong market share gains in this space should ideally provide a good boost to the company’s growth over the next five years. .
What upside can investors expect?
Based on the revenue outlook above, AMD’s revenue could reach $31.2 billion in 2025. Based on this year’s revenue outlook of $23.0 billion, the company would still benefit of 16% annual revenue growth in 2024 and 2025. If it maintains this growth at a conservative rate through 2027, its annual revenue would reach approximately $41 billion by the end of the next five years.
Multiplying AMD’s revenue estimate by its five-year average price/sales ratio of 7.4, the stock would have a market cap of $303 billion. That would be a jump of more than 60% from its current level, suggesting that AMD could offer above-market returns for investors looking to buy a growth stock in the long term, especially given its potential aggressively move into new areas such as AI.
Chauhan hard has no position in the stocks mentioned. The Motley Fool fills positions and endorses Advanced Micro Devices. The Motley Fool recommends Intel and recommends the following options: Long Call January 2023 at $57.50 on Intel and Long Call January 2025 at $45 on Intel. The Motley Fool has a disclosure policy.
