How AMD Stock Can Double To Over $300

Could AMD stock (NASDAQ:AMD) reach $300 in the next few years? We think there is a possibility. How? Consider this, just about eleven months ago, at the end of October 2023, AMD stock was trading at around $90 levels. This year the stock has grown over 80% since, and trades at close to $165 presently. Looking at the valuations, AMD stock trades at about 62x trailing earnings and just about 31x projected 2025 earnings. Is this pricey? Not really. Especially if you consider the company’s steadily expanding earnings, its growing share of the CPU market, and the long-growth runway for the artificial intelligence market. Separately, the Fed’s recent rate cut could also provide a boost as investors seek growth opportunities in a low-rate environment. In the scenario below, we use AMD’s revenues, profitability, and valuation multiples to demonstrate a potential path to a $ 300-plus stock price.

AMD’s GPU Roadmap Will Drive Revenue Growth

AMD’s revenues have risen considerably from $6.7 billion in 2019 to about $22.7 billion in 2023, an annual growth of about 35%, and the momentum can hold up. While AMD is likely to see sales growth cool to about 13% this year to about $25.7 billion, consensus projects a close to 28% growth for FY’25. However, If AMD grows its sales at an average annual rate of close to 35% for the next two years, led by growth in accelerated computing space and its new GPUs, its revenues could move from around $25.7 billion in FY’24 to around $46.5 billion by FY’26, or an over 80% increase.

Several trends could drive this continued growth. AMD is likely to see strong tailwinds from the generative AI trend, as graphics processing units have become the de-facto chips for running AI-related workloads. While AMD largely focused on GPU for gaming and design, it has quickly pivoted to chips aimed at large language model training and inference for generative AI. AMD recently unveiled its Instinct MI325X chips, which will go head-to-head against Nvidia’s upcoming Blackwell chips. AMD has been positioning its AI chips as being more competitive for use cases where models are used for content creation or forecasting. This could prove advantageous for the company, as AI models are increasingly becoming multimodal—working with speech, images, video, and 3D—which requires much more processing power. Costs are also becoming a concern for end-customers of AI chips, as Nvidia’s strong pricing power has pushed its net margins above 50% in recent quarters. This could benefit AMD, as customers look for more affordable alternatives to build out data centers quickly. This trend is already playing out. For example, Oracle recently chose AMD’s accelerated computing chips to power its latest supercluster for high-intensity AI workloads, after testing showed AMD’s GPUs delivered low latency and strong performance at a competitive price.  Overall, there is plenty of room for growth as AMD projects that the market for AI accelerator chips will reach approximately $400 billion in 2027.

Separately, last month’s monetary easing by the Federal Reserve could provide a boost to AMD. The Fed’s 50 basis point rate cut marked the first interest rate cut in close to four years. Check out our analysis of other ways to profit from the Fed’s next move?  With the benchmark federal funds rate standing at 4.75% to 5% post the cut, there remains room for the central bank to lower interest rates further. Lower rates are typically beneficial for growth sectors including technology, which have higher earning potential in outer years, as lower discount rates boost the present value of future earnings. The lower rates are beneficial to AMD. Why?  Lower interest rates would reduce financing costs for builders of large data centers, potentially driving up capital spending in the space, and helping players like AMD which sells GPUs and CPUs for servers. Moreover, given that the economics of the AI revolution remain mixed, given the high costs of model training and inferencing, a drop in interest rates could improve the financial feasibility of these investments.

AMD Has Already Done It In The Past

AMD stock has fared well over the last 4-year period, rising from levels of about $90 in the beginning of  2021, to highs of over $200 earlier this year. However, the gains have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 57% in 2021, -55% in 2022, and 128% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Margins Should Remain Thick Driven By Higher-End Products

Combine this robust revenue growth with the fact that AMD’s adjusted net margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory – they grew from levels of about 11% in FY’19 to over 19% in Q2 FY’24 as the company sees better economies of scale and a more favorable product mix skewed toward complex data center products. Margins could potentially trend still higher to levels of about 25%, as AMD sees higher GPU sales with higher economies of scale improving its fixed cost absorption. Now combining 25% adjusted net margins, with about $46.5 billion in revenue would translate into earnings of about $11.6 billion. That’s a roughly 2.7x increase from levels seen in 2023.

Strong Results Mean A Smaller Contraction In Earnings Multiples

Now, if earnings grow 2.7x, the PE multiple will shrink by 2.7x to levels of about 23x, assuming the stock price stays the same. But that’s exactly what AMD investors are betting won’t happen. If earnings expand 2.7x over the next few years, instead of the PE shrinking from a figure around 62x now to about 23x, a scenario where the PE metric stays at about 45x looks quite likely, as stronger growth and expanding margins give investors more confidence about AMD’s future. This would make the growth of AMD stock to levels of about $320 within the next few years a real possibility. What about the time horizon for this high-return scenario? While our above example illustrates a 2-plus year time frame, in practice, it won’t make much difference whether it takes 2 years or 3, as long as AMD is on this revenue expansion trajectory, with margins holding up, the stock price could respond similarly. 

While investors have their fingers crossed for a soft landing by the U.S. economy following the start of the Fed’s monetary easing cycle, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/11/2024
[2] Cumulative total returns since the end of 2016

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