The past five years have been fruitful for Advanced Micro Devices (AMD +3.32%) investors, as an investment of $1,000 made in the stock half a decade ago is now worth almost $2,200 as of this writing.
However, to put things in perspective, the 118% jump in AMD's shares in the last five years is lower than the 178% jump clocked by the PHLX Semiconductor Sector index over the same period. The past year has been especially difficult for AMD investors, as the stock has shed 41% of its value during this period. This big drop can be attributed to AMD's inability to capitalize on the booming demand for artificial intelligence (AI) chips, a market where arch-rival Nvidia has established a dominant position.
But then, AMD's recent results have been solid, and the company has more than one catalyst that could help revive its stock market fortunes over the next five years. We are going to take a closer look at AMD's potential growth drivers and check why it may be a good idea to buy and hold this stock for the next five years.
Why the past five years have been a mixed one for AMD
AMD's financial performance over the past five years has been mixed. While the company's revenue and earnings increased in 2020, 2021, and 2022 on account of strong sales of its central processing units (CPUs) and graphics cards used in personal computers (PCs), its bottom line growth fizzled after a strong start.
AMD Revenue (Annual) data by YCharts
That's because the demand for PCs waned following strong sales in the years of the novel coronavirus pandemic. AMD was left with excess inventory on its hands, and it had to write it down, leading to a sharp decline in the company's earnings. Meanwhile, the company's data center business was in fine shape throughout this period as it continued gaining server CPU share from Intel.
But then, sales of gaming consoles from Sony and Microsoft, which are powered by AMD's semi-custom processors, started maturing and led those tech giants to place fewer orders. Throw in the fact that AMD is way behind Nvidia in the market for gaming graphics cards, with a share of just 10%; it is easy to see why the company's gaming business has been struggling for traction.
So, the mixed performance of AMD's various businesses has weighed on the stock's performance over the past five years. However, the good news is that all the segments discussed above are likely to enjoy solid growth over the next five years, paving the way for more upside in AMD stock.
These growth drivers could send this chipmaker higher in the next five years
AMD's performance over the next five years will depend on the health of key segments such as gaming, data centers, and PCs. The good part is that all these business segments are likely to enjoy secular growth thanks to varied catalysts.
The company's gaming business, for instance, should benefit from the arrival of new gaming consoles from Microsoft and Sony. The current console generation is close to five years old. A new one is likely to arrive within the next two to three years as both Sony and Microsoft have historically released a new generation of consoles every seven to eight years.
Both Sony and Microsoft are expected to release their next-generation consoles in 2026 or 2027. That could give AMD's semi-custom chip business a nice boost as it has reportedly been selected by the console makers to supply the processors for their next-gen consoles.
Moving from gaming to PCs, AMD has already started witnessing solid traction in this market. The company's client segment revenue increased by an impressive 52% in 2024 to a record $7.1 billion, thanks to "strong demand for AMD Ryzen processors in desktop and mobile." The prospects of the PC market for the next five years appear to be bright due to the advent of generative AI.
According to one estimate, the AI PC market's revenue is expected to jump by almost 5x between 2024 and 2030. This bodes well for AMD's long-term prospects, especially because the company has gained a larger PC processor market share. The chipmaker ended 2024 with almost 25% of the client CPU market under its control, up by almost five percentage points from the prior-year period, according to Mercury Research.
Its revenue share of the client PC market grew at a faster rate, jumping 8.4 percentage points year over year. This points toward AMD's improving pricing power in the PC processor market, as its revenue share is improving at a faster pace than the unit share. Moreover, it won't be surprising to see AMD gaining more market share as arch-rival Intel isn't expected to launch a new desktop CPU until next year.
NASDAQ: AMD
Key Data Points
As such, the stage seems set for healthy growth in AMD's gaming and PC segments over the next five years. At the same time, the company's data center business is also getting better, even though it is playing second fiddle to Nvidia in the AI GPU (graphics processing unit) market. AMD's data center revenue nearly doubled last year to a record $12.6 billion, driven by strong sales of both its server CPUs and GPUs.
The company sold at least $5 billion worth of data center GPUs in 2024. AMD forecasts that its data center GPU business could grow to "tens of billions, as we go through the next couple of years." In fact, AMD could clock solid revenue in data center GPUs over the long run, even if it manages to corner a small portion of this market for itself.
In the end, it can be concluded that AMD seems set for outstanding earnings growth over the next five years. That's why buying this stock seems like a no-brainer right now, especially considering its price/earnings-to-growth ratio (PEG ratio) of just 0.42 based on its five-year projected earnings growth, according to Yahoo! Finance.
A PEG ratio of less than 1 means that a stock is undervalued in light of the growth it is expected to deliver, and AMD is trading well below that threshold. So, investors looking to buy a growth stock that's trading at attractive levels can consider adding AMD to their portfolios. This stock looks positioned for impressive long-term upside.
