Advanced Micro Devices, Inc. (NASDAQ:AMD) has been a hot stock over the last five years, delivering gains of over 680%. This growth was driven by AMD’s proven ability to steal market share from its main competitor, Intel.
Intel still has a healthy grip on the chip market, commanding a share of over 68%. But AMD is on the rise, now owning a 31% market share, and the company shows no signs of slowing down.
Despite that, the stock has cooled off over the last 12 months. AMD shares are down around 4%, but most of the losses came in 2022. This year has been much brighter for the chipmaker, with the company up over 35% year-to-date.
That’s due to a bright outlook for the company, as AMD made strong headway into the Data Center segment. The company also recently announced groundbreaking new gaming and graphics processors.
There are still some concerns, and chief among them is the marked decline in PC sales. The decreased revenue combined with the billions of dollars AMD spent in acquisitions has some investors on edge.
So where will AMD stock be 5 years from now?
How AMD Makes Its Money
AMD operates in four segments: Gaming, Client, Data Center, and Embedded. Each of these segments has specific objectives and specific revenue expectations.
The Data Center segment has become a main focus for the company because it offers the most opportunity for growth. Central Processing Units (CPUs) and Graphics Processing Units (GPUs) for company servers and cloud platforms have been in high demand.
The Client segment is focused on consumer products like the processing and graphics units that AMD makes for desktops and laptops. This segment has historically been the most lucrative for the company, though that may be changing.
The Gaming segment produces processors and graphics cards for consoles like the PlayStation 5 and Xbox Series X.
Finally, the Embedded segment puts AMD computing technology into other electronics and equipment.
Fourth Quarter Ups and Downs
In the fourth quarter of 2022, AMD reported revenues of nearly $5.6 billion, a 16% Year-Over-Year (YOY) increase. The company was able to cover losses in the Gaming and Client segments by making headway in the Data Center and Embedded segments.
The Client segment brought in $903 million but that was a major hit, representing a 51% loss YOY. Supply chain issues and low demand for PCs drove an operating loss of $152 million, down 29% from last year.
The Gaming segment posted a loss too, but not as dramatically. The $1.6 billion in sales was a 7% decline YoY, coming due to low demand for graphics units for gaming consoles.
The Data Center segment, however, brought in $1.7 billion, a 42% YoY increase. AMD’s successful EPYC server processor drove the increase in revenue. Even still, operating income was slightly less year-over-year due to R&D costs.
The Embedded segment brought in revenue that was comparable to the other segments at $1.4 billion. But that represents a whopping 1,868% increase in revenue versus last year. This increase was mostly due to AMD’s purchase of Xilinx.
In February 2022, AMD grew its immense portfolio of products by closing on a $50 billion deal to acquire Xilinx. This deal allowed AMD to enter previously uncharted sectors like the automotive, industrial, aerospace, and defense industries.
But there are some downsides to the deal. The heavy cost to acquire Xilinx was largely responsible for the decrease in gross margin, the operating loss, and diminished net income for the fourth quarter of 2022.
Even still, AMD didn’t stop at that deal. In May 2022, the company completed the acquisition of Pensando for $1.9 billion. AMD made the move hoping that the addition of the Pensando Data Processing Unit (DPU) will help them gain more leverage with Data Center clients.
Banking on Gaming
Despite the decline in graphics card sales for gaming consoles in the fourth quarter, AMD still expects the segment to deliver in the future. Deals with Microsoft and Sony mean that AMD processors will be powering PlayStation and Xbox consoles for the foreseeable future.
Even as PCs decline, the demand for gaming consoles is expected to increase. Aside from the major consoles, AMD also struck a deal with gaming upstart Valve. Their powerful new handheld console, the Steam Deck, takes aim at the massively popular Nintendo Switch, and it’s powered by an AMD processor.
While the Steam Deck is not expected to overtake the gaming giants, it has managed to carve out a niche for itself. The company expects sales to surpass 3 million units in 2023. Given AMD’s position with Microsoft and Sony and the up-and-coming Valve, AMD expects much more revenue from the gaming segment in years to come.
Other Product Horizons
AMD isn’t just counting on consoles to do the gaming heavy lifting. The chipmaker recently announced a new series of Ryzen X3D processors that claim to be the fastest PC gaming chips in the world. For mobile users, AMD announced the Ryzen 7045HX for gaming on the go.
The company also announced a partnership with Microsoft to deliver Ryzen AI, a groundbreaking mobile experience that will use AI to assist content creators. Another new product, the Radeon RX7000 graphics unit, aims to provide high-definition gaming.
Where Will AMD Stock Be In 5 Years?
With all of the new products and new deals AMD has made, expectations are high for the future. In the short term, the company expects revenue of around $5.3 billion for the first quarter of 2023. That represents a 10% loss from last year, a fact that could turn some investors bearish.
But the stock has made consistent gains this year for a reason. AMD has been able to overcome slow PC sales and expand into other markets successfully. Given the steady rise in market share, the exciting innovations on the horizon, and the company’s past performance, AMD is a promising investment for the long haul.
From a valuation analysis using a 5 year discounted cash flow analysis, upside to fair value at $118 per share is around 32.5% by our calculations.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.