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AMD stock is surging on powerful earnings from its partner TSMC.
Wells Fargo calls AMD stock its "top pick."
Advanced Micro Devices (NASDAQ: AMD) stock soared 6% through 11:10 a.m. ET Thursday after its semiconductor chips manufacturer, Taiwan Semiconductor Manufacturing Company (NYSE: TSM), reported strong Q4 2025 earnings.
TSMC earned $2.98 per share on sales of $32.7 billion in Q4, blowing away analyst estimates. AMD forecast continued "strong demand for our leading-edge process technologies" in Q1 2026.
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Adding to investor enthusiasm, analyst Aaron Rakers from investment bank Wells Fargo upgraded AMD stock to his "top pick" this morning.
"We see significant upside potential" in AMD stock, said Rakers, forecasting AMD will rise 55% this year, "driven by continued CPU leadership and [market] share gains, as well as strengthening AI positioning with the datacenter GPU portfolio."
Rakers projects AMD will earn $20 per share by 2029, a more than 10-fold increase from the $1.90 that AMD earned over the last 12 months, calling "data center compute demand" for AI chips "insatiable."
AMD shareholders had better hope he's right about that, because right now, AMD stock is looking a bit pricey. Shares retail for more than 117 times trailing earnings. Versus a 44% long-term forecast growth rate, that works out to a PEG ratio of more than 2.6.
On the plus side, AMD exhibits strong free cash flow of $5.4 billion in cash generated over the past year -- meaning, for every $1 AMD reports in "earnings," it actually generated about $1.64 in real cash profit! By this metric, the stock's valuation drops to only 67 times FCF, giving AMD a more reasonable-sounding (but still expensive) price-to-free cash flow ratio of 1.5x.
AMD stock is probably a buy, but I personally wouldn't mind seeing its price drop a bit before acting on that opinion.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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