Will AMD be a trillion-dollar stock by 2030?

One trillion dollars, yes a lot of of money. In fact it is So a lot of money, it can be difficult to comprehend.

If you took $1 trillion worth of $1 bills and stretched them from end to end, they would stretch nearly 97 million miles — longer than the distance from the Earth to the sun.

Nevertheless, there are companies worth this astronomical sum, and there are undoubtedly more. Shall Advanced Micro Devices (AMD -5.44%) be one of them? And can it reach a $1 trillion valuation by 2030? Let’s find out.

Person looking at a computer screen and thinking.

Image source: Getty Images.

How much AMD has grown over the past five years

To understand where AMD could be headed in the coming years, we must first examine how the company has grown over the past five years. Namely how its market capitalization has increased.

In 2019, AMD’s market capitalization was $28 billion. Today, the company has a market capitalization of more than $263 billion. That makes it the 28th largest company in America, bigger than business icons such as Coca Cola, Walt Disney And McDonald’s.

Indeed, AMD has shot up the list at a truly breathtaking rate. The market capitalization has grown at an astonishing compound annual growth rate (CAGR) of 54% over the past five years.

AMD market cap chart

AMD Market Cap data by YCharts

Not surprisingly, the company’s excellent fundamentals are behind its impressive growth. Over the past five years, sales have grown from $5.9 billion to $22.7 billion. Net cash flow (i.e. cash reserves minus total debt) increased from zero to $3.3 billion.

Can AMD reach $1 trillion by 2030?

Despite remarkable growth over the past five years, it will still be an uphill task for AMD to reach $1 trillion by 2030. The company’s market capitalization should almost quadruple. That implies a CAGR of 27.5%.

To achieve this, the company must develop its biggest growth area: the market for artificial intelligence (AI) chips.

AMD’s fantastic CEO Lisa Su has noted that the total AI chip market could grow to $400 billion by 2027. That is more than ten times the size of the market in 2022.

Currently, much of that market is controlled by AMD’s rival, Nvidia. However, AMD has a plan to increase its share of the AI ​​chip market, starting with its MI300x chips, which are designed to compete with Nvidia’s top AI chips. With AMD set to report quarterly earnings in a few weeks, investors should get an update on how that plan plays out.

Either way, reaching the $1 trillion mark is a big ask. And while I certainly wouldn’t rule it out, AMD will have to perform almost flawlessly for the next five years to achieve this.

Is AMD a buy now?

Whether or not AMD will reach $1 trillion by 2030, the real question for investors is whether the stock is a buy right now. While I’m optimistic about the company’s long-term growth prospects, there’s no denying that the stock’s valuation looks expensive today. The shares trade at a price-to-sales ratio of 11.6, more than double the 10-year average of 5.

AMD PS Ratio Chart

AMD PS Ratio data by YCharts

Additionally, key long-term metrics such as free cash flow per share have fallen in recent years as the company has ramped up its capital expenditures.

In short, AMD has been a great stock to own, and it’s poised to benefit from the AI ​​revolution in the long term. However, investors may want to exercise caution at this point. The stock’s high valuation means it is not a wise choice for every investor.

Jake Lerch has positions in Coca-Cola, McDonald’s, Nvidia and Walt Disney. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Walt Disney. The Motley Fool has a disclosure policy.