Where will AMD stock be in 3 years?

The past year has been Advanced Micro Devices (NASDAQ:AMD) Investors responded as the chipmaker’s shares soared 130%, outperforming the broader market. PHLX Semiconductor Division The index surged 57%. Investors piled into the stock, anticipating that the company’s growth would accelerate quickly. AI (AI)-driven chip demand.

Even Wall Street is optimistic about AMD’s prospects. Get three upgrades Earlier this month from barclays bank, Susquehanna Financial Group and KeyBanc Capital Markets. Barclays raised its price target on AMD to $200 from its previous estimate of $120, while KeyBanc and Susquehanna raised their targets to $195 and $170, respectively. AMD’s closing price on January 23 was $168.

Analysts aren’t always right, but these price targets suggest healthy upside for AMD stock. However, one analyst at Northland Capital Markets doesn’t think so. The investment banking firm recently downgraded AMD stock to “market perform” from “outperform,” noting that the company’s AI business may not grow as fast as investors expect.

Northland also said that AMD’s sharp rise over the past year means that its stock price has already reflected the potential artificial intelligence-driven revenue growth that the company may achieve in 2027. Does this mean AMD stock is priced perfectly right now, but could struggle to sustain its torrid run over the next three years?

AMD stock is expensive, but that’s only half the story

AMD’s trailing price-to-earnings ratio is as high as 1,500 times, a result of the stock’s sharp rise over the past year even as its earnings have declined.

AMD chart

AMD chart

AMD’s profit decline can be attributed to a weakening personal computer (PC) market. According to statistics, PC sales will drop by nearly 15% in 2023 Gartner Corporation.

More specifically, in the first nine months of 2023, AMD’s sales revenue for central processing units (CPUs) deployed in desktops and laptops fell nearly 40% annually to $3.2 billion. During the period, the segment’s operating loss was $101 million. Operating profit for the period was $3.1 billion.

As a result, AMD’s total operating income for the first three quarters of 2023 fell to $59 million from $1.4 billion in the same period last year. The company is expected to earn $2.65 per share in 2023, down from $3.50 per share. By 2022, AMD’s profits will grow significantly.

AMD current fiscal year earnings per share forecast chartAMD current fiscal year earnings per share forecast chart

AMD current fiscal year earnings per share forecast chart

AMD’s strong earnings growth is why AMD’s forward P/E is much cheaper than its trailing P/E.

AMD P/E ratio chartAMD P/E ratio chart

AMD P/E ratio chart

AMD is widely predicted to achieve such a big transformation in 2024 for two reasons.

First, Canalys predicts that the PC market will grow by 8% in 2024. More importantly, the market research company predicts that PC shipments will grow by 10% annually in 2025, 2026, and 2027. This year and beyond, pressure on AMD’s profits should be a thing of the past.

The good news is that the potential improvement in the PC market is already showing up in AMD’s financial data. Its customer segment revenue increased an impressive 42% year-over-year in the third quarter, and operating profit also reached $140 million. Operating loss was $26 million in the same period last year.

Second, AMD’s data center business looks set to grow strongly. The segment’s revenue fell 4% in the first nine months of 2023 to $4.2 billion. At this operating speed, AMD’s data center revenue may reach $5.6 billion by 2023. Analysts, however, predict a surge in sales of AMD’s artificial intelligence-focused accelerators this year, which could bolster the company’s data center business.

While AMD itself expects AI GPU (graphics processing unit) revenue to reach $2 billion in 2024, KeyBanc’s supply chain examination shows that AMD may generate $8 billion in revenue through sales of the newly launched MI300 series of AI chips. Data center revenue in 2023 will almost entirely consist of server CPU sales.

As a result, AMD expects the $8 billion in revenue generated through its AI chip sales to be almost entirely incremental to its data center business.

AMD is expected to gain more share in the artificial intelligence chip market, which could lead to solid long-term growth for the company.

Artificial intelligence could give AMD a huge boost over the next three years

Northland Capital Markets analyst Gus Richard estimates that AMD may capture 13% of the AI ​​chip market in 2027 and is expected to generate $16 billion in revenue. This suggests that AMD’s AI revenue is expected to double every year starting in 2024. The company expects to sell $2 billion worth of AI chips this year.

However, other estimates, such as this one from KeyBanc, suggest AMD could reach the $16 billion milestone sooner.

But even if we use Northland’s relatively conservative forecast, which expects AMD’s overall revenue to grow to $45 billion in 2027, investors can expect more upside from the stock over the next three years. AMD’s five-year average sales multiple is based on a revenue forecast of $45 billion, and the company’s market capitalization could reach $360 billion by 2027, a 32% increase from current levels.

However, don’t be surprised to see more upside for AMD, as the market will likely reward it with a higher sales multiple given that companies that benefit from artificial intelligence tend to receive premium valuations from Wall Street.

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harsh johan The Motley Fool has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices. The Motley Fool recommends Barclays Plc and Gartner. Motley Fool has disclosure policy.

Where will AMD stock be in 3 years? Originally published by The Motley Fool

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