June 13, 2024

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Will AMD Reach a $1 Trillion Market Cap by 2030?

4 min read

Advanced Micro Devices (NASDAQ: AMD) has become one of the more profound comeback stories of the last few years. When Lisa Su became CEO 10 years ago, it lagged rival Intel and appeared to be near bankruptcy.

Today, it is one of the leading chip companies, rising to a market cap of almost $275 billion. That means it has to double less than twice to reach a $1 trillion market cap. Nonetheless, semiconductor stocks are notoriously cyclical, and with Nvidia well ahead of AMD in the AI chip space, attaining a $1 trillion market cap by 2030 is far from assured.

AMD’s path to $1 trillion

Given the $275 billion market cap, doubling that amount 1.9 times would take the market cap just above $1 trillion. For that to happen, the market cap has to rise by an average of 24% over the next six years.

At first glance, achieving that benchmark is not far-fetched. AMD’s data center revenue rose 80% in the first quarter of 2024 to $2.4 billion. While that didn’t match Nvidia’s 262% overall revenue increase in its latest quarter, it shows AMD derives some benefit from the massive demand for AI chips.

Unfortunately for AMD, revenue shrunk by 4% yearly in 2023. Also, in the first quarter of 2024, it rose by only 2% to $5.5 billion as significant declines in gaming and embedded revenue negated most of the growth in client and data center revenue. Gaming and embedded revenue dropped by 48% and 46%, respectively.

Moreover, AMD suffered two years of yearly net income declines. Also, even in Q1, net income of $123 million rose from a $139 million loss in the year-ago quarter. That indicates that while a negative cycle may be turning around, it is unclear how much that will help the stock.

Prospects for growth

That relatively low profit level points to an elevated P/E ratio of 253. Thus, the forward P/E ratio of 49 probably better reflects its valuation. Nonetheless, the average forward multiple over the last five years is 35, indicating significant overvaluation.

Also, its growth is not in a position to match Nvidia’s performance. The data center segment accounted for 43% of AMD’s revenue. Thus, even if AMD grows enough to match the percentage of revenue from AI chips, the bump will not be as dramatic as it was for Nvidia.

Still, two of the four segments, gaming and embedded, will likely benefit from an upcycle. While the aforementioned declines may appear disconcerting, it is more likely due to an inevitable pullback that comes with the industry’s cyclicality.

Ultimately, analysts expect demand to rise longer term, with Allied Market Research projecting a 38% compound annual growth rate (CAGR) for AI chips through 2032 and a 9% CAGR for the overall industry. Thus, the forces holding back its lagging segments are unlikely to last.

AMD in 2030

Considering the secular growth expected for all types of semiconductors and the massive demand for AI chips, AMD stands a strong chance of reaching $1 trillion by 2030.

Admittedly, the industry remains highly cyclical, and it is too early to tell where in the cycle the various chip sectors will find themselves in 2030. Hence, it is unclear when it will reach that milestone.

However, with a six-year time horizon, AMD should be a primary beneficiary of the secular demand for chips. Hence, even if the market cap does not reach $1 trillion in 2030, it will more than likely significantly exceed today’s $275 billion market cap.

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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Will AMD Reach a $1 Trillion Market Cap by 2030? was originally published by The Motley Fool

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