Why AMD's Impressive Growth Is Just Getting Started

Advanced Micro Devices (NASDAQ: AMD), which investors better know as just AMD, is one of the top chipmakers in the world. While it's often seen as a distant second to Nvidia and its industry-leading chips, AMD has been garnering a lot more attention of late. This year, the stock has been outperforming its rival with gains of around 70%, compared to just 33% for Nvidia.

AMD's growth has been accelerating, and its chips have been attracting the attention of leading artificial intelligence (AI) companies, including ChatGPT maker OpenAI, which is a key customer. In the long term, there can still be much more growth to come for the business.

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AMD is projecting strong growth for the next three to five years

Over the past year, AMD's growth rate has been accelerating, which is welcome news for growth investors who had become frustrated with the company's lack of progress, especially with seeing Nvidia deliver fantastic results of its own. Now that AMD's top line is growing by more than 30%, there's been a more compelling reason to invest in this AI stock of late.

AMD Revenue (Quarterly YoY Growth) data by YCharts

Earlier this month, the company posted its third-quarter results, which showed that AMD's revenue grew by 36% to $9.2 billion for the period ending Sept. 27. What was even more impressive was its earnings growth of 61%, with its bottom line coming in at $1.2 billion.

CEO Lisa Su expects that there's even more growth ahead for the business in the future. Su projects that over the next three to five years, the company's top line will expand by over 35% on an annual basis. In particular, data centers are a key growth area to watch for, with Su expecting AI-related revenue for this area of its business to grow by over 80% per year during the forecast period.

There looks to be a ton of growth on the horizon for AMD. But whether or not the tech company is still a good buy could hinge on its valuation, which has already soared significantly this year.

Is the growth already priced into AMD's stock price?

With some hefty gains this year, AMD's stock is trading at elevated levels, and that means expectations will be high moving forward.

Investors are likely expecting stronger growth from AMD now that its chips are proving they can compete with Nvidia. Recently, AMD got a strong vote of confidence from OpenAI, with the chatbot maker agreeing to deploy up to 6 gigawatts of AMD GPUs as part of a multi-year agreement. And OpenAI could end up taking a 10% stake in AMD as well.

Currently, AMD's stock trades at a price-to-earnings (P/E) ratio of more than 100, a significant premium for a growth stock. But as the company scales its business due to AI and its margins improve, that multiple should come down significantly. Its forward P/E multiple factors in analyst estimates of how the business will perform over the coming year, and that multiple is much lower at 33. It's a bit higher than the Technology Select Sector SPDR Fund's forward P/E of around 30, but for a leading chipmaker, the premium could be justifiable.

And in the longer term, there's even a case that the stock is cheap. AMD's PEG ratio, which factors in growth over the next five years, is around 0.5, which suggests it could be a steal of a deal; the cutoff for a good growth stock is a PEG of 1.0 or lower, and AMD is well below that level.

AMD could be one of the better AI stocks out there today

In recent years, the market has been focused on Nvidia and other AI companies while AMD has been a bit of an afterthought. Although it's been soaring this year, it may still have much more room to rise, especially as tech companies look to alternatives to Nvidia's high-priced chips. That's why, for long-term investors, AMD could be a compelling investment to hold on to right now.

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.