Artificial intelligence (AI) minted its first $1 trillion company last year when Nvidia (NVDA 0.82%) stock soared 239%, thanks to unprecedented demand for its AI data center chips. Nvidia continues to create value, and it's now worth $2.2 trillion, making it the third-largest company in the world behind Apple and Microsoft.
The trillion-dollar club is incredibly exclusive, with Amazon, Alphabet, and Meta Platforms being the only other members. However, another company might be poised to join the ranks within the next decade.
Advanced Micro Devices (AMD 0.43%) is an emerging challenger to Nvidia in the market for AI chips. The company is valued at just $270 billion as of this writing, so investors who buy the stock today could see a gain of 270% if it does eventually join the trillion-dollar club. Here's why I think it will.
NASDAQ: AMD
Key Data Points
AMD's AI opportunity transcends the data center
Last year AMD unveiled its MI300 lineup of data center chips designed to process AI workloads. They come in two configurations: The MI300X is a pure GPU that competes with Nvidia's H100, and the MI300A combines GPU and CPU hardware to form an accelerated processing unit (APU).
Considering Nvidia can't keep up with demand for its chips, the door is open for competitors like AMD to snatch market share. In the fourth quarter of 2023 (ended Dec. 31, 2023), AMD told investors it was working with tech giants like Microsoft, Oracle, and Meta on MI300 GPU deployments for AI. Microsoft has already begun private previews with customers for the MI300X on its Azure cloud computing platform, where developers can access advanced AI models like OpenAI's GPT-4.
AMD predicts the MI300 series could attract $3.5 billion in sales in 2024. That forecast was revised higher from $2 billion just three months earlier, which speaks to how quickly demand is building. Nvidia did $47.5 billion in data center revenue last fiscal year, driven mostly by its H100, so there is still plenty of room for AMD to grow.
However, AMD's opportunity in AI transcends the data center. It already has a 90% market share in chips for AI-enabled personal computers, led by its Ryzen AI series, which includes CPUs, GPUs, and neural processing units (NPUs). The company says millions of AI PCs have already shipped with those chips, from manufacturers like Dell, Lenovo, Asus, and HP Inc.
Processing AI on-device results in a faster user experience, because workloads don't have to travel to and from the data center. That allows computers to host advanced virtual assistants capable of creating text content, images, and videos potentially without any network connection. Ryzen AI chips sent AMD's Client segment revenue soaring 62% year over year during Q4, and investors should watch for more rapid growth in the upcoming first quarter of 2024.
AMD could be poised for significant revenue growth
The semiconductor industry is cyclical, which means growth is sometimes lumpy from year to year. Consumers don't upgrade expensive products like computers and smartphones annually, which leads to an occasional lull in revenue growth for companies like AMD.
For example, AMD's revenue soared 44% in 2022 to $23.6 billion, but it came in at $22.7 billion in 2023, which was a 4% year-over-year decline. High inflation and rising interest rates didn't help, because they piled additional pressure on consumer spending.
Commercial spending on the data center presents the same challenge. Tech giants like Microsoft normally don't upgrade their hardware every year; however, Nvidia CEO Jensen Huang believes AI will change that in the near term. He says $1 trillion worth of existing data center infrastructure will be upgraded within four years to meet demand for accelerated computing and AI, which could drive a significant growth cycle for his company and the likes of AMD.
Wall Street analysts are forecasting $25.8 billion in 2024 revenue for AMD, which will represent growth of 14%. They also predict $32.5 billion in 2025 revenue, which would be an accelerated growth rate of 26%. However, considering AMD recently lifted its own forecast for MI300 sales by such a wide margin, combined with its soaring sales in AI-enabled computer chips, it's possible the company blows Wall Street's numbers out of the water.
After all, Nvidia routinely beats expectations in the data center, and AMD's MI300 sales are only just starting to ramp up.
Image source: Getty Images.
AMD's (mathematical) path to a $1 trillion valuation
AMD is currently valued at $270 billion, and based on its $22.7 billion in 2023 revenue, its stock trades at a price to sales (P/S) ratio of 11.9. If that P/S ratio remains constant, AMD will have to generate $84 billion in annual revenue to justify a $1 trillion valuation.
The company could get there within a decade if it grows revenue by a relatively modest 14% each year between now and 2034. AMD appears likely to meet the threshold comfortably in the near term based on the Street's forecasts for 2024 and 2025.
Plus, despite the lumpiness in its yearly results, AMD's revenue has grown at a compound annual rate of 15.6% over the last 10 years -- and that's without AI, which could be the company's largest opportunity ever.
Multiple expansion is also a possibility. If AMD's revenue grows much faster than analysts expect, investors could be willing to pay a higher P/S ratio for the stock. Nvidia stock, for example, trades at a P/S ratio of 35.8 -- triple where AMD stock is trading. That would accelerate the company's path to a $1 trillion valuation.
AMD is a very likely candidate to join Nvidia, Microsoft, Apple, Amazon, Alphabet, and Meta in the trillion-dollar club, and investors who buy the stock today could earn a significant gain when it gets there.
