The comeback of Advanced Micro Devices (NASDAQ: AMD) is one of the more notable turnaround stories of the past decade. Investors left it for dead in the late-2000s as the decline of the PC appeared to leave it without a place in the semiconductor industry.
But thanks to the turnaround started in 2015 and orchestrated by CEO Lisa Su, AMD has become a formidable competitor. That success helped take the semiconductor giant's market cap to around $175 billion. Given its profitable growth, some are now asking whether AMD can become a $1 trillion stock by 2030. Let's explore the assertion and see if an answer arises.
AMD's burgeoning businesses
Under Lisa Su, AMD narrowed its product offerings to CPUs and GPUs. Thanks to this focus, its processors for gaming and data centers have helped drive its revenue higher, even as client sales (meaning chips for PCs) have remained stagnant.
Also, with the acquisition of Xilinx, AMD is now a major player in the embedded chip market. In the second quarter of 2023, embedded was AMD's fastest-growing segment as chip demand in the automotive, industrial, and other industries continued to rise.
Still, one area of struggle involves AI-related chips, an industry currently dominated by rival Nvidia(NASDAQ: NVDA). AMD released the MI300x in June, a chip it called "the world's most advanced accelerator for generative AI." It intends to ramp up production late in the year.
But while market share estimates vary, Nvidia undoubtedly dominates this market, a factor that will likely make it difficult for AMD and others to mount a significant challenge.
Financials and estimates
Additionally, recent financials reflect a slump in the chip industry. For the first six months of 2023, revenue of just under $11 billion fell 14% compared with the same period in 2022.
Since operating expenses continued to rise during that time, AMD reported a generally accepted accounting principles (GAAP) loss of $112 million in the first half of the year after earning a net income of more than $1.2 billion in the first six months of 2022.
Nonetheless, boom and bust cycles have defined the semiconductor industry throughout its history. Hence, investors should expect declines periodically.
Also, the down cycle seems to have ended. AMD's estimate of $5.7 billion in revenue at the midpoint for Q3 could mean a year-over-year revenue increase. Moreover, consensus estimates point to non-GAAP earnings of $2.01 per share in 2023, a level expected to approximately double by 2025.
Whether that translates to stock gains for AMD is unclear. After losing more than half its value in the 2022 bear market, the semiconductor stock's price has risen by more than 65% in 2023. Still, its forward P/E ratio now stands at 39, while the price-to-sales (P/S) ratio is around 8. Such levels are higher than the stock's historical averages, though AMD appears inexpensive compared to Nvidia's P/S ratio of 35.
AMD's march to $1 trillion
Given the state of AMD, investors should not expect its market cap to reach $1 trillion. While the prospect of doubling non-GAAP earnings in two years might make investors think it will reach that goal, investors need to expect some down years. Also, with the company behind Nvidia in AI, it is unclear what kind of traction AMD will gain in that industry.
However, AMD is an enormously successful company in gaming, data centers, and the embedded industry. This likely means it will build sustained revenue and profit gains over time. Hence, even if it falls short of the $1 trillion market cap over the next seven years, AMD stock will likely earn considerable returns over that timeframe.
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Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.