Advanced Micro Devices (NASDAQ: AMD) stock or ‘AMD’ has been a phenomenal investment recently. Over the last five years, the share price has risen about 600%.
Here, I’m going to look at where the chip stock could be in another five years. Let’s crunch some numbers.
The business
Before I calculate a future stock price, it’s worth briefly discussing what Advanced Micro Devices does.
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It’s a semiconductor company that designs chips for a range of industries including cloud computing, data centres, video gaming, electric vehicles, and artificial intelligence (AI).
Recently it has been getting attention due to its AI exposure. It has been developing high-powered chips (the MI300X) in an effort to go head to head with AI chip powerhouse Nvidia.
It’s worth pointing out, however, that there are key differences between the firms.
Nvidia is the dominant player in the high-end chip market. And currently, it has an 80% market share in the AI chip space.
By contrast, Advanced Micro Devices is a major player in the mid-range and budget chip markets. Many of its products are used for regular computing.
So, even if it was to see strong growth from its AI chips in the years ahead, it may not grow at the same pace as Nvidia.
Share price forecast
To predict its future price, I’m going to use a sales-multiple approach. This involves trying to predict what the company’s sales will be in the future and then applying a multiple to get a market cap and share price.
This approach has its flaws. For example, it’s very simplistic in nature and one needs to make a lot of assumptions. But it’s an easy-to-understand approach that could give us a rough indication of where the stock could get to.
For 2024 and 2025, Advanced Micro Devices sales are forecast to come in at $26bn and $32.2bn (let’s assume these forecasts are accurate). These figures would represent annual growth of 15% and 24%.
I don’t know if this kind of growth is sustainable all the way out to 2029. After all, the company operates in a cyclical industry.
But let’s say that the company was able to generate 15% growth per year between 2026 and 2029. That would take us to revenue of $56.3bn for 2029.
Now, the forward-looking price-to-sales ratio is about 10.4 today. But that’s at the higher end of the spectrum (in 2022 it fell to just three).
So, let’s apply a sales multiple of eight here.
Multiplying $56.3bn by eight gives us a market cap of approximately $450bn, which is around 66% higher than today’s share price. That translates to a share price of $279.
I want to stress that there are many variables here and my forecasts could be way off the mark. For example, it could average 10% revenue growth over the next five years. Meanwhile, in five years’ time, it could be trading at a price-to-sales ratio of five.
All things considered, though, I’m pretty bullish on the stock taking a long-term view.
I’m waiting for a pullback
Having said that, I’m not a buyer right now. In my view, the stock has got a little ahead of itself recently.
I wouldn’t be surprised to see a decent pullback in the near future. If we see one, I’ll be buying.
