Semiconductor stocks have been in solid shape in 2024, as evidenced by their 25% year-to-date gain. PHLX Semiconductor Sector Index despite a recent decline. But not all companies in this sector have been able to deliver outstanding returns during this period.

The industry is benefiting from the increasing use of artificial intelligence (AI) in several industries, which explains why the shares of chip manufacturers such as NVIDIA And Broadcom continue to rise. However, Advanced micro devices (NASDAQ:AMD) has lagged as the stock has risen only 7% this year, underperforming the sector and generally S&P500.

However, a closer look at AMD’s AI-related prospects suggests that its recent underperformance is unlikely to last long. This $250 billion company could resume its upward trajectory soon, but will it be enough to become a trillion-dollar stock by the end of the decade?

AMD can benefit from the use of AI in several areas

While AMD’s larger rival Nvidia may have taken the lead in the market for graphics processing units (GPUs), which are used in data centers to train and deploy AI models and applications, AMD has also begun to make a name for itself in this space.

In the second quarter, AMD reported record revenue of $2.8 billion in its data center business, a huge jump of 115% year-over-year. Notably, however, AMD’s growth in its data center business was driven not only by growing demand for its AI GPUs, but also by a surge in sales of its Epyc server central processing units (CPUs). On the company’s most recent quarterly earnings call, CEO Lisa Su noted:

So AMD can benefit from the growth of AI data centers in two ways. First, it taps into the AI ​​GPU market, which the company expects could be worth a whopping $400 billion by 2027. AMD is significantly behind Nvidia in the AI ​​GPU market. However, investors should note that AMD sold over $1 billion worth of its MI300 data center GPUs last quarter, which was a record.

The company has set new records in sales of the MI300 GPUs over the past three quarters, while also steadily increasing its revenue forecast for AI GPUs. The company predicts that it could sell at least $4.5 billion worth of data center GPUs in 2024, more than double the $2 billion forecast it released last October.

The story continues

AMD launched its MI300 processors late last year, meaning data center GPUs are off to a good start and could eventually lead to bigger advances for the company given the long-term opportunity in this space.

Nvidia reportedly controls a whopping 98% of the AI ​​GPU market. If AMD can increase its share to 10% by the end of the decade, and the AI ​​GPU market is worth $400 billion by that time, the company could generate $40 billion in revenue from this segment. That would be almost 10 times the revenue the company will generate from this market in 2024.

The second opportunity for AMD is in the AI ​​CPU market, which is expected to generate annual revenue of $410 billion in 2030, up from just $15 billion last year. This opportunity consists of both AI servers and personal computers (PCs), where demand for CPUs capable of supporting AI workloads will increase due to the long-term growth opportunities in these markets.

For example, the AI ​​PC market is expected to grow at a CAGR of 44% between 2024 and 2028. AI servers, on the other hand, are forecast to grow at a CAGR of 30% through 2033. AMD is in a position to make the most of both of these opportunities – its share of the data center CPU market increased an impressive 5.6 percentage points year-on-year to 24.1% in the second quarter of 2024, according to Mercury Research.

Revenue share was even better at 33.7%, indicating solid pricing power. AMD has also gained ground in the PC processor market. Its desktop CPU share rose 3.6 percentage points to 23.0% last quarter, while its mobile processor market share increased 3.8 percentage points to 20.3%.

So AMD is well positioned to take full advantage of the huge end-market opportunity in AI CPUs. More importantly, however, the opportunities discussed above show us why analysts expect AMD’s growth to accelerate next year.

But can it become a trillion-dollar company?

We’ve already seen that AMD’s growth prospects are likely to remain solid through the end of the decade. What’s more, analysts expect the company’s earnings to grow at a compound annual growth rate (CAGR) of 33% over the next five years.

Assuming the company could sustain a 25% annual earnings growth rate through the end of the decade, its earnings could rise to $12.93 per share in 2030 (based on forecast earnings of $3.39 per share for 2024). Multiplying that by AMD’s average earnings multiple of 33 for the next five years (which is lower than the U.S. technology sector’s average earnings multiple of 43) suggests a share price of $427 after five years.

That would be a 188% increase from AMD’s current share price, meaning its market cap could nearly triple to $690 billion by 2030. While that might not be enough to hit the $1 trillion mark, it would be far from a disappointing outcome for this AI stock.

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Harsh Chauhan does not own any stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Will AMD be a trillion-dollar stock by 2030? was originally published by The Motley Fool