Where is Advanced Micro Devices (AMD) Likely to Stand after 12 Months?

Where is Advanced Micro Devices (AMD) Likely to Stand after 12 Months?

Artificial intelligence (AI) has been driving the expansion of numerous tech firms lately, leading to an increase in AI infrastructure spending. Consequently, this has benefited companies like Advanced Micro Devices (AMD), with tech giants investing in advanced processors.

However, AMD's stock hasn't seen as much growth as a result of the AI boom, with Nvidia overshadowing a substantial part of AMD's impressive results. Over the past year, AMD's stock has dropped by 13% compared to the S&P 500's 26% increase (as of this writing). So, where is AMD headed in the next year? Let's explore.

AMD is leveraging AI's growth potential

To forecast where AMD might be in a year, first, examine its current status. In its third quarter (ended Sept. 28), AMD's sales escalated by 18% year over year to $6.8 billion, and diluted GAAP earnings per share surged 161% to $0.47.

The primary catalyst for AMD's growth in the quarter was its data center revenue, which includes the sales of its GPU processors for AI. This revenue segment saw a remarkable 122% increase to $3.5 billion. Management suggested that this solid sales growth sets AMD up to achieve a 22% increase in fourth-quarter sales, which would bring sales to $7.5 billion.

The company is profiting from large tech companies ramping up their spending on AI infrastructure, with Nvidia estimating that this could amount to $2 trillion over the next five years. Even AMD's management has had to adjust to the surge in AI semiconductor spending. The company now anticipates full-year data center GPU revenue to reach $5 billion, a significant jump from its initial $2 billion estimate at the beginning of the year.

Despite AI opportunities, AMD's 2025 may still have hurdles

Predicting why one company underperforms the market while its competitors soar can be challenging. However, in AMD's case, a few factors could impact investor sentiment over the next year.

First, some investors have expressed displeasure regarding the considerable revenue declines in AMD's gaming and embedded segments - 69% and 25%, respectively, in the third quarter. Although AI holds promise for the future, these declining sales figures are not instilling optimism in AMD for some investors.

Second, and more significantly, AMD is facing an uphill battle against Nvidia. While AMD offers impressive hardware, Nvidia holds an estimated 70% to 95% of the AI semiconductor market. Battling for market share against Nvidia will be a formidable task over the next year.

Even though AMD is likely to continue benefiting from the shift to AI, it's more challenging to predict whether its share price will rise in the next year. At this point, I'd recommend staying on the sidelines with AMD, but purchasing shares might not be a bad move if you're looking for affordable AI stocks.

As of now, AMD's forward price-to-earnings ratio stands at 25.1, in contrast to Nvidia's more expensive forward P/E ratio of 32.6. Keep in mind that AMD may be somewhat volatile as investors attempt to assess the company's long-term AI potential while grappling with declining sales in other segments and AMD's GPU competition with Nvidia.

Given AMD's strong performance in its data center segment, particularly in AI, further investments in this area could be a wise move for financial planning. The company's anticipated data center GPU revenue of $5 billion is a testament to its potential growth in finance, particularly in the context of the projected $2 trillion investment in AI infrastructure over the next five years.

However, AMD's challenge lies in competing with Nvidia, which dominates the AI semiconductor market. This competition could impact AMD's stock performance in the future, making it crucial for investors to carefully consider their risk tolerance towards this stock.

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