Artificial intelligence (AI) launched its first $1 trillion company last year Nvidia (NASDAQ:NVDA) The stock rose 239% thanks to unprecedented demand for its AI data center chips. Nvidia continues to create value and is now worth $2.2 trillion. This makes it the third largest company in the world Apple And Microsoft.
The trillion dollar club is incredibly exclusive, with Amazon, alphabetAnd Metaplatforms being the only other members. However, another company could be ready to join the ranks within the next decade.
modern micro devices (NASDAQ:AMD) is an emerging challenger to Nvidia in the AI chip market. As of this writing, the company is worth just $270 billion, so investors who buy the stock today could see a 270% gain when the company eventually joins the trillion-dollar club. Here’s why I think it will be.
AMD’s AI opportunity extends beyond the data center
Last year, AMD introduced its MI300 line of data center chips designed to handle 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 into an Accelerated Processing Unit (APU).
With Nvidia unable to keep up with demand for its chips, the door is open for competitors like AMD to capture market share. In the fourth quarter of 2023 (ending December 31, 2023), AMD told investors that it was working with tech giants like Microsoft. oracleand 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 such as OpenAI’s GPT-4.
AMD predicts that the MI300 series could generate $3.5 billion in sales in 2024. That forecast was revised upward from $2 billion just three months earlier, showing how quickly demand is increasing. Nvidia generated $47.5 billion in data center revenue last fiscal year, driven largely by the H100, so there’s still plenty of room for AMD to grow.
But AMD’s AI capabilities extend beyond the data center. The company 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 these chips, from manufacturers like DellLenovo, Asus and HP Inc.
On-device AI processing results in a faster user experience by eliminating the need to transport workloads to and from the data center. This allows computers to host advanced virtual assistants that can potentially create text content, images and videos without a network connection. Ryzen AI chips drove AMD’s consumer segment revenue 62% year-over-year in the fourth quarter, and investors should watch for faster growth in the upcoming first quarter of 2024.
AMD could expect significant sales growth
The semiconductor industry is cyclical, meaning growth from year to year is sometimes irregular. Consumers don’t upgrade expensive products like computers and smartphones every year, which occasionally leads to a lull in sales growth for companies like AMD.
For example, AMD’s revenue rose 44% to $23.6 billion in 2022, but totaled $22.7 billion in 2023, down 4% year-over-year. High inflation and rising interest rates didn’t help, as they increased pressure on consumer spending.
Commercial data center spending presents the same challenge. Tech giants like Microsoft don’t typically update their hardware every year; However, Nvidia CEO Jensen Huang believes AI will change this in the near future. He says $1 trillion in existing data center infrastructure will be modernized within four years to meet demand for accelerated computing and AI, which could drive a significant growth cycle for his company and companies like AMD.
Wall Street analysts forecast AMD will report revenue of $25.8 billion in 2024, representing growth of 14%. They also forecast revenue of $32.5 billion in 2025, which would represent an accelerated growth rate of 26%. However, considering AMD recently raised its own MI300 sales forecast so significantly, combined with soaring sales of AI-enabled computer chips, it’s possible that the company will dwarf Wall Street’s numbers.
After all, Nvidia regularly exceeds expectations in the data center, and AMD’s MI300 sales are just starting to rise.
AMD’s (mathematical) path to a $1 trillion valuation
AMD is currently valued at $270 billion, and based on its 2023 revenue of $22.7 billion, its stock trades at a price-to-sales (P/S) ratio of 11.9. If this P/E ratio remains constant, AMD needs to generate $84 billion in annual revenue to justify a $1 trillion valuation.
The company could reach that goal within a decade if it increases revenue by a relatively modest 14% each year through 2034. Based on the Street’s forecasts for 2024 and 2025, AMD should easily reach this threshold in the near future.
Plus, despite fluctuations in annual results, AMD’s revenue has grown at a compound annual rate of 15.6% over the past 10 years – and that’s without AI, which could be the company’s biggest opportunity of all.
Multiple expansion is also possible. If AMD’s revenue grows much faster than analysts expect, investors might be willing to pay a higher P/E ratio for the stock. Nvidia shares, for example, trade at a P/E ratio of 35.8 – triple where AMD shares are traded. 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 stand to make a significant profit if they get there.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, HP, Meta Platforms, Microsoft, Nvidia and Oracle. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Unstoppable Stock That Could Join Nvidia, Microsoft, Apple, Amazon, Alphabet and Meta in the $1 Trillion Club was originally published by The Motley Fool