The past three years have been forgettable for Advanced Micro Devices(NASDAQ: AMD) investors. Shares of the chipmaker have declined 5% during this period, while the PHLX Semiconductor Sector index has recorded impressive gains of 36%.
The chipmaker has missed the artificial intelligence (AI) gravy train thus far. Its revenue from sales of data center graphics cards has been disappointing, with rival Nvidia building a monopoly-like position for itself in this space. AMD's reliance on the personal computer and gaming markets for a significant chunk of its revenue has also weighed on the share price.
The weakness in the PC market in 2022 and 2023 dented sales of AMD's central processing units (CPUs). Meanwhile, the sluggish gaming console market, which recorded just 2.4% growth in 2024, has turned out to be another headwind for the company. However, it wouldn't be surprising to see a turnaround in AMD's fortunes over the next three years. Let's see why that may be the case.
The PC market is expected to be in good health over the next three years
The PC market endured double-digit declines in 2022 and 2023. The good news for AMD is that the market stabilized in 2024, witnessing a 0.8% increase in shipments, per market research firm IDC. Even better, the PC market is expected to record 4.3% growth this year, driven mainly by a 5.1% improvement in sales of commercial PCs.
Factors such as the end of support for Windows 10 in October this year, along with the growing adoption of AI-capable PCs, are going to drive the market's recovery. IDC forecasts that the PC market could clock an annual growth rate of 1.4% through 2028. Sales of AI PCs, however, are expected to grow at a much faster pace. Canalys expects that AI PCs will account for 60% of the overall PC market by 2027, compared to 19% last year.
AMD is positioning itself to capitalize on this tremendous opportunity. The chipmaker recently revealed that PC giant Dell Technologies will use AMD's CPUs in its commercial offerings. Dell has been using AMD's processors for its consumer PCs, but this is the first time that it has announced using the chipmaker's CPUs in commercial PCs. AMD's AI-capable CPUs will also power over 100 commercial PC platforms in 2025.
All this should set the stage for more market share gains for AMD, which has been consistently eating into rival Intel's client CPU market share. More specifically, AMD controlled 23.9% of the client CPU market at the end of the third quarter of 2024, up from 19.4% in the year-ago period, per Mercury Research. This market share gain explains why AMD's revenue from the client CPU segment increased 29% year over year in Q3 2024 to $1.9 billion, growing at a faster pace than the overall PC market.
As the PC recovery gains momentum in 2025 and continues over the next three to four years, there's a solid chance that AMD could keep clocking healthy growth in this segment.
Data center and gaming are going to be additional catalysts for AMD
AMD's data center business was another solid performer in Q3 2024. Revenue rose 122% year over year to $3.5 billion, thanks to the improving demand for its data center graphics cards and the company's improving share of the server CPU market. It won't be surprising to see the data center segment driving healthy growth for AMD over the next three years.
That's because the chipmaker is forecasting 60% annual growth in its total addressable market (TAM) for data center AI chips through 2028 to an annual revenue of $500 billion. AMD is a small player in this space right now, as it expects to generate more than $5 billion in revenue from sales of data center graphics cards in 2024. However, the company kept increasing its data center graphics cards revenue forecast throughout last year, beginning from an initial target of $2 billion.
A combination of an improved supply chain and the stronger demand for AMD's data center graphics cards should ideally allow the company to sustain the solid momentum in this business and capture a bigger piece of the end-market opportunity on offer. Moreover, AMD is set to push the envelope in data center graphics cards by releasing a new chip every year, which could help the company claw some share from leader Nvidia.
What's worth noting is that AMD doesn't need to take a lot of share away from Nvidia in the data center graphics card market. Even a 10% share by 2028 could send its data center GPU (graphics processing unit) revenue to $50 billion (based on the $500 billion TAM), which would be 10 times the revenue it's expecting to generate from this segment in 2024.
Finally, Microsoft and Sony are expected to launch their next-generation gaming consoles in the next three years. AMD manufactures the semi-custom chips that power the gaming consoles from these two tech giants, and rumors suggest that the chipmaker is likely to remain the supplier for the next-gen consoles as well.
If that's indeed the case, AMD's gaming business could get a nice boost. The company pointed out that its gaming revenue was down 69% year over year in Q3 2024 to $462 million, owing to reduced demand for its semi-custom chips that are deployed in gaming consoles. So, investors can expect a potential turnaround in this segment in the next three years when the new console generation goes into production.
The above catalysts indicate why analysts are forecasting healthy growth in AMD's earnings in 2025 and 2026.
Consensus estimates put AMD's expected 2024 earnings at $3.33 per share. The chart above tells us that its bottom line could increase at an annual rate of around 45% for the next couple of years. The growth drivers discussed above suggest that AMD could sustain a healthy rate of growth in 2027 as well.
There's a good chance that this semiconductor stock could regain its mojo and jump higher going forward.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $27 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
