Advanced Micro Devices Inc. (NASDAQ:AMD) stock increased by an impressive 74.98% YoY, which indicates investors’ optimistic outlook on AMD.

AMD could gain better market share in the semiconductor industry by enhancing its product advancements and increasing AI-integration demand. However, it faces intense competition with other large firms like Nvidia. AMD stock holds a potential upside of 29.9% over the next 12 months, which could reach up to $197.45. AMD stock is a buy for now. 

Catalysts for AMD Stock

AMD has been launching new products, which could catalyze its growth and enhance its expansion into the growing AI industry. On April 16, the company introduced its new product line, the AMD Ryzen PRO 8040 Series and the 8000 Series.

The main difference between these two products is its targeted market segments. AMD Ryzen PRO 8040 Series is an innovative processor designed for high-performing and intensive mobile and laptop professionals’ workloads.

The series focused on the market segment that required high performance with energy efficiency, like photo editing and content creation. Conversely, the Ryzen 8000 Series aims to support daily business desktop workloads.

This includes applications that require high processing power, like data analysis and complex computations. These diverse and customized product features indicate AMD’s ability to expand its targeted markets and increase its revenue streams. 

The new Ryzen 8040 and 8000 Series are among the first processors to incorporate the WiFi-7 technology, providing quicker and smoother workflows.

This feature offers a groundbreaking advantage for the product. Both of these products aim to integrate Ryzen AI technology into selected models, which enhances the models’ abilities in AI-related tasks.

By integrating AI into its models, AMD has demonstrated its quick adaptation, making it a suitable product for future demands of customers for AI processing technologies and functions in their computing hardware.  

The introduction of the new product shows AMD’s continued focus on improving its product lineup across the markets. These latest developments are essential for technology companies like Advanced Micro to stay competitive against other competitors and meet customers’ evolving demands.

Although AMD’s competitors, like Intel and Nvidia, also offer AI-powered products, AMD’s direct integration of AI into the processors with the innovative WiFi-7 technology demonstrates its proactive approach to enhancing customers’ experiences and advancing connectivity standards.

Moreover, AMD also partners with different big firms in the industry, including Microsoft, Intel, HP, and Lenovo. Strengthening industry partnerships could be a crucial driver for its growth and future market expansion.

I believe AMD’s adaptability and broadened product portfolio could sustain its future growth. 

Valuation 

The company’s revenue has a substantial increase from FY2020 to FY2022, with an average increase of 55.97%. However, the revenue slightly decreased by 3.9% in FY2023. The decrease in revenue is mainly because of the lower processor sales.

The forecast revenue growth for the company is around 15-19%, primarily driven by the possible increased sales of its newly innovative products. Moreover, there is a decrease in its operating income margins, from 5.36% in FY2022 to only 2% in FY2023.

According to the company, the decrease is due to increased investment in research and development. I forecast the operating margins to grow up to 3% in FY2024 and increase to an average of 5-7% for future years. 

The cost of equity is calculated to be 10.1% with a beta of 1.22. The cost of debt is 5.44%. The company’s cash flows are discounted based on the calculated WACC of 10.2% and the terminal growth rate of 4%.

The equity value divided by AMD’s current share outstanding of 1.6 billion shares gives the equity value per share of $197.45. This gives a potential 29.8% upside over the next 12 months from the current price of $152.08. 

Risk 

One of the most visible risks AMD faces is competition within the semiconductor and AI industry. Some of its prominent competitors are Nvidia and Intel.

The competition in producing semiconductors will continue to be intense because of the rapid technological changes and frequent product innovations from competitors.

Competitors like Intel could benefit from the government support called the CHIPS Act in 2022, which provides financial support for semiconductor producers. However, the company indicates in its recent 10-K reports that it isn’t beneficial from this program.

I think this could make the competition harder for AMD as it doesn’t receive the investment compared to its competitors. 

As a multinational corporation, AMD’s revenue is generated from different global markets, especially China. With 15% of its revenue coming from China, the U.S. government’s restriction on exporting U.S. chips into China could further complicate the company’s operation.

Recently, Chinese officials ordered its telecom systems to replace all foreign chip processors by 2027. This news caused its shares to drop by 4% last Friday. Geopolitics’ continued restrictions and difficulties could adversely impact the company’s future growth. 

Conclusion 

Overall, AMD holds a solid future growth prospect. Its ability to adapt and innovate its product portfolio to satisfy customer’s evolving demands in the industry makes the company more attractive to investors for long-term growth.

The company has many products that are doing well and have sustained growth. Despite its efforts to innovate the product, it’s notable that AMD still faces hard challenges competing with competitors like Nvidia and Intel. Also, the increased restrictions in China’s market could negatively impact its growth.

However, its newly introduced AMD Ryzen PRO 8040 Series and 8000 Series can offer customers more diversity and increase the company’s sales in other market segments for the following year. This could potentially surge AMD stocks to $197.45, for a 29.9% upside from its current price of $152.08, if it could effectively invest and maintain its growth.   

On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.