1 Semiconductor Stock That Could Join Apple, Microsoft, Amazon, and Alphabet in the $1 Trillion Club – The Motley Fool
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Advanced Micro Devices has just made a big change to its artificial intelligence teams.
United States Steel became the world’s first $1 billion company in 1901, and it took a full 117 years before Apple was crowned the first-ever $1 trillion company in 2018.
It remains an incredibly rare achievement — Apple is one of only five companies globally with a valuation exceeding $1 trillion. The other four are Microsoft, Amazon, Google parent Alphabet, and oil giant Saudi Aramco.
This exclusive club is likely to grow over time, particularly with exciting new opportunities ramping up in areas like advanced computing and artificial intelligence (AI). With that in mind, one company with the potential to eventually earn membership is semiconductor producer Advanced Micro Devices (AMD -3.90%).
Since its market capitalization is currently just $131 billion, AMD’s stock price would have to soar 663% for the company to reach a $1 trillion valuation. That won’t be easy, but it is certainly doable. Here’s how it could get there.
AMD just reported its financial results for the first quarter of 2023, and some investors were not impressed, sending the stock price down 9% on the day despite the company beating Wall Street’s forecasts on both revenue and earnings per share (EPS). Some of the short-term data released explains the drop, but there were also developments with much longer-term implications that were announced.
Like its key competitor Nvidia, AMD is putting substantial focus on how it can benefit from the interest in AI. The technology requires advanced chips to train large language models like OpenAI’s ChatGPT, which has captured the tech world’s attention this year.
When discussing Q1 earnings, CEO Lisa Su mentioned that researchers used the AMD-powered LUMI supercomputer to train the largest finished language model to date, which is spurring significant demand from customers for the next-generation, purpose-designed Instinct MI300 chip. That platform is due for release later this year. It combines CPU (central processing unit) and GPU (graphics processing unit) technologies to create what AMD refers to as the world’s first APU — or advanced processing unit — for data centers.
AMD says the MI300 will deliver eight times greater performance for AI applications than its MI250X predecessor.
To accelerate the company’s progress in its AI initiatives, Lisa Su told investors AMD would bring together multiple teams working on the technology and house them under one department. The division will be overseen by Victor Peng, the ex-CEO of adaptive computing giant Xilinx, which AMD acquired for $49 billion in 2022.
Generative AI software can converse with users through text and voice; create images, music, and videos; and even write computer code. Estimates for its potential future value seem to have skipped over the billions of dollars and are already in the trillions. Why? Because the technology stands to significantly increase economic productivity.
According to Cathie Wood’s Ark Investment Management, a typical software engineer will deliver 10 times more output by 2030 thanks to coding assistants like ChatGPT and Copilot. All kinds of knowledge workers — from lawyers to scientists — who could benefit from the ability to analyze mountains of data rapidly will see similar results.
As a result, Ark Invest analysts forecast that generative AI will add $200 trillion in output to the global economy by the end of this decade, creating $90 trillion in enterprise value for the companies involved in developing the technology. Those companies will require advanced computing hardware just like AMD’s Instinct MI300, creating a potential gold rush for semiconductors that could extend well beyond 2030.
The faster AMD can improve its hardware, the greater its market share potential will be and the more value it stands to capture.
As I mentioned earlier, despite surpassing expectations, AMD’s 2023 first-quarter results were met with pessimism among investors. It delivered $5.35 billion in revenue, which was down 9% year over year but above the $5.31 billion consensus estimate among Wall Street analysts. And the company’s $0.60 in non-GAAP (adjusted) EPS also beat the projected $0.56.
But the road to becoming a member of the $1 trillion club won’t be determined by one quarter’s performance. AMD generated $23.6 billion in revenue last year, and based on the company’s $131 billion current valuation, its stock trades at a price-to-sales (P/S) ratio of 5.5. Assuming that number remains constant, AMD will need to deliver $182 billion in annual revenue to justify a $1 trillion valuation.
In other words, AMD could get there in 10 years if it grows its revenue at a compound annual growth rate (CAGR) of 22.6% between now and then.
Over the last decade, the company has grown by an average of only 15.8% annually. However, there’s no doubt the opportunities in the semiconductor industry have only increased more recently with the widespread adoption of cloud computing and off-premise data centers. As a result, the company’s CAGR over the last five years was a much faster 34.6% — despite the pandemic, supply chain disruptions, and a weak economic environment recently.
If Ark Investment’s predictions about the potential of AI come to fruition, there’s a strong chance AMD’s next 10 years will crush its previous 10 in terms of growth. If the company does join Apple, Microsoft, Amazon, and Alphabet in the $1 trillion club, investors who buy AMD stock today stand to gain a whopping 663%!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon.com, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
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