Key Points
Advanced Micro Devices (NASDAQ: AMD), better known as just AMD, is one of the largest tech companies that’s not in the trillion-dollar club right now. Currently, its valuation sits at around $800 billion. In just the past 12 months, its shares have skyrocketed more than 300% as its growth rate has improved and investors have begun to take it more seriously in its attempts to take market share from rival Nvidia in the chip market.
Given its robust growth opportunities and the excitement around artificial intelligence (AI) these days, is it inevitable that AMD hits a market cap of $1 trillion this year?
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Could the bullishness around AMD’s stock continue this year?
The latter part of this year could be a crucial time for AMD. Back in February, CEO Lisa Su said that the second half of the year would be an “inflection point” for its business as it ships Helios, its new server-scale system for AI.
Strong demand for Helios could be what gives the tech stock the added boost that it needs to reach $1 trillion in market cap. To get to $1 trillion, AMD’s stock would need to rise by another 25%, which may seem like a trivial amount given how strong its gains have been over the past year and the excitement around AI stocks as a whole.
A big part of the reason investors have become more bullish around AMD has been due to its improving growth rate. In its most recent quarter, which ended on March 28, its revenue totaled $10.3 billion, representing a year-over-year increase of 38%. In the previous quarter, its growth rate was more modest at 34%. A continued acceleration due to Helios may convince investors that the stock is the real deal, giving it the push it needs to hit $1 trillion in market cap.
The expected growth may already be priced into the stock’s value
The biggest challenge for AMD’s stock at this stage may simply be due to valuation. It’s trading at more than 160 times its trailing earnings, and even when you factor in analyst expectations, its forward price-to-earnings multiple is still high at around 67. At such a high premium, the market may already be expecting Helios to do exceedingly well, and unless it completely blows past expectations, the stock may not necessarily experience a surge in value.
While I wouldn’t rule out the possibility of AMD reaching $1 trillion this year, I don’t expect it to finish there this year. Valuations have been elevated for some time in tech, and I believe a correction may be coming for the overall sector. Buying AMD stock at its current price is risky as it depends on a rosy outlook for tech and AI. With virtually no margin of safety, I wouldn’t rush to buy the stock right now.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
