AMD (AMD.O) has long played the role of a “bridesmaid” rather than a “bride.” Despite this, even though it lags behind market leader Nvidia (NVDA.O) in the field of artificial intelligence, AMD's stock performance is still good.

Over the past five years, AMD's stock price has risen by more than 500%, but has fallen about 20% since peaking on March 7. This initial decline was due to quarterly earnings exceeding expectations by only one cent after the market boom receded in early 2024, and there was no change in outlook forecasts, which is worrying. AMD appears to have failed to catch up with Nvidia in the field of artificial intelligence to make up for weakness in other areas such as video games and automotive chips.

Investors, however, need not worry. AMD's gaming and industrial business should stabilize, and demand for data center chips will grow with the company's diverse suppliers. In fact, AMD's current position is similar to when Intel (INTC.O) dominated chip sales back then.

“This is Pepsi and Coca Cola in the semiconductor industry,” said Rhys Williams, chief investment officer of Wayve Capital Management. He added that the tech industry needs a second source other than Nvidia to ensure that chips are always available at a reasonable price.

The point is: AMD stock is likely to continue its long-term growth trend — growing more than 1000% in 20 years. Although this is less than Nvidia's 53,000% increase, it is also quite impressive.

The investment logic for AMD stock began with the stability of its industrial and gaming businesses. Although not as dazzling as AI, these two fields will account for half of AMD's business in 2023.

AMD's industrial revenue, which includes sales to automakers, other manufacturers, and telecommunications companies, is close to bottoming out. The first quarter was US$846 million, and analysts expect the fourth quarter of this year to rise to about US$1.1 billion, showing a modest year-over-year increase. The sector has been plagued by oversupply for the past few years, and AMD and its rivals are now addressing this.

Obviously, semiconductor company Adnor's performance last week was beneficial to the industrial sector. In its fiscal second quarter report, Adeno reported industrial sales of more than 1 billion US dollars, exceeding expectations of 95.3 billion US dollars. This higher-than-expected performance helped the stock rise by more than 10% on Wednesday.

The recovery in game sales is likely to be even slower. Analysts expect game revenue to decline this year, but it will increase by several hundred million dollars next year to reach $3.37 billion. The key is consumers' health and that new games expected to be launched next year, such as Take-Two Interactive Software's “Grand Theft Auto VI”, inspire consumers to buy game consoles.

These recoveries will shift the focus to AMD's data center business, including its new AI chip, the MI300. Although sales of the MI300 did not grow as rapidly as expected, it is gradually picking up speed. Management anticipated sales of $3.5 billion in 2024 during the January earnings call, then raised it to $4 billion in late April due to increased demand.

In fact, the MI300 has become AMD's fastest chip release ever. In April, CEO Su Zifeng said that the sales volume of the MI300 had exceeded 1 billion US dollars less than two quarters after its launch. Su Zifeng and other AMD executives were unable to comment on this post.

Demand comes from Meta Platforms (META.O), Microsoft (MSFT.O), Alphabet (GOOGL.O), and other chip customers who are building data center capacity to support AI. They need to buy chips right away and want to limit costs, which means buying from multiple vendors is beneficial to AMD.

According to FactSet analysts, AMD's sales to data centers should reach $12.2 billion in 2024, almost double that of last year. Given that this is less than 15% of Nvidia's estimated $94 billion data center sales, this goal seems doable. As AMD improves the production and performance of the MI300 (a common process in the early stages of new chips), its price should be close to Nvidia Dara.

Analysts expect AMD's data center revenue to grow 35% per year to reach more than $30 billion by 2027. This growth is faster than forecasts for overall AI spending — Gartner expects an annual growth rate of 20% over the same period — and Nvidia's data center expectations. But that speed isn't surprising — AMD is catching up.

According to FactSet, AMD's total revenue is expected to reach $47 billion, and operating margins will expand by more than 10 percentage points. Data center chips not only have higher profit margins and are growing faster, but total chip sales are expected to grow faster than wages and R&D costs.

As a result, AMD's earnings per share can grow almost 40% per year, from $2.65 last year to $10 in 2027. The stock isn't cheap: it's trading at 38 times the expected earnings for the next 12 months, which is a few percentage points higher than Nvidia's multiple. But from another perspective, this multiple is reasonable: it is less than 1 times the expected increase in earnings, and the price-earnings ratio of the S&P 500 index is 2 times the expected increase in earnings.

The point is that AMD can play the second-place role after Nvidia while still being a good choice for investors, just as it was when it caught up with Intel. Being in second place also has its rewards.