Buying and holding solid stocks for a long time is a tried-and-tested way of making money in the stock market, as this strategy helps investors capitalize on secular growth opportunities and disruptive trends while also allowing them to benefit from the power of compounding.
This explains why an investment of $1,000 in shares of Advanced Micro Devices (AMD -1.27%) a decade ago would now be worth more than $33,500. And that’s despite the sharp pullback in the company’s shares over the past month. AMD has significantly outperformed the Nasdaq Composite index’s returns of 235% in the past decade, driven by its market share improvements in central processing units (CPUs), which are deployed in servers and personal computers (PCs).
AMD is sitting on solid catalysts that could help it replicate its terrific performance in the future. Of course, putting all your money on AMD and expecting it to deliver life-changing returns that could make you a millionaire is not a feasible idea. However, AMD could deliver solid long-term returns and help investors in constructing a million-dollar portfolio.
AMD is set up for outstanding growth
The past year hasn’t been a good one for AMD investors as shares of the company have lost 43% of their value during this period. The stock’s decline can be attributed to AMD’s inability to make the most of the huge demand for server graphics processing units (GPUs) deployed in artificial intelligence (AI) data centers.
The AI data center GPU market has the ability to supercharge AMD’s growth. However, the fact that it sold around $5 billion worth of data center GPUs last year compared to archrival Nvidia‘s $102 billion revenue from data center compute chips suggests that it is missing out on a massive growth opportunity. But then, investors would do well to take a look at the bigger picture.
AMD registered 14% growth in revenue in 2024 to just under $26 billion, while its non-GAAP (adjusted) earnings per share grew at a faster pace of 25%. The chipmaker’s growth accelerated in the final quarter of the year, with revenue jumping 24% on a year-over-year basis along with a 42% spike in adjusted earnings per share.
AMD’s robust growth in the fourth quarter can be attributed to the market share gains the company is clocking in the CPU market. Its combined share of the server and PC CPU markets increased by 4.3 percentage points year over year in the fourth quarter of 2024 to 24.6%. The growth in the revenue share was greater at 6.7 percentage points on a year-over-year basis to 28.2%.
These numbers indicate that AMD still has a lot of room to grow its unit and revenue share in the server and client CPU markets. The good part is that the company could continue gaining share in these markets thanks to the troubles faced by the larger player, Intel. AMD has been consistently taking share away from Intel by producing chips based on advanced process nodes, and it could keep doing so with the help of its foundry partner, TSMC.
AMD is expected to build chips using TSMC’s 2-nanometer (nm) chip for manufacturing its next-generation CPUs. These chips are expected to deliver a 10% to 15% increase in computing power while achieving a 20% to 30% drop in power consumption, compared to the current 3nm chip platform, which AMD uses to build its current generation of processors.
Intel, on the other hand, has been struggling on account of botched product launches and it even abandoned its sales forecast for AI data center chips late last year. As such, it won’t be surprising to see AMD enjoying healthy growth in its data center and client CPU businesses in the future considering the huge revenue opportunity in these markets.
The data center CPU market, for instance, is expected to more than triple in size between 2024 and 2033, generating an annual revenue of almost $49 billion at the end of the forecast period. AMD sold an estimated $7.5 billion worth of data center CPUs in 2024 (considering that $5 billion of its $12.6 billion data center revenue came from sales of server GPUs). So, the company still has a lot of room for growth in this market over the next few years.
Meanwhile, AMD doesn’t need to dominate the data center GPU market to register substantial growth in its revenue and earnings in the future. Even second place in this massive market could translate into remarkable growth for the company.
Throw in additional catalysts such as the upcoming gaming console cycle, the potential growth of the AI PC market, and the improving prospects of the embedded chip business, and it is easy to see why analysts are expecting AMD’s earnings to grow by 40% this year followed by a 34% increase next year. It could maintain such healthy growth levels for a longer period considering the multibillion-dollar addressable markets it serves.
The chipmaker’s valuation is too attractive to ignore right now
AMD is anticipated to deliver healthy earnings growth this year, and in the future. With the stock trading at just 20 times forward earnings, buying AMD right now looks like the smart thing to do. What’s more, AMD has a price/earnings-to-growth ratio (PEG ratio) of just 0.37 based on its five-year projected earnings growth, according to Yahoo! Finance.
A PEG ratio of less than 1 means a stock is undervalued with respect to the growth that it is expected to deliver over the next five years. So, AMD seems like a top growth stock to buy right now thanks to its healthy growth potential and cheap valuation, and it may even help investors in building a million-dollar portfolio in the long run in light of the sizable end markets it serves.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.