Creating artificial intelligence (AI) software demands a massive amount of computing power. As a result, a lot of this work is concentrated in sizable data centers that house thousands of specialized chips known as graphics processing units (GPUs). Nvidia is currently at the forefront of the data center GPU sector, but Advanced Micro Devices (NASDAQ: AMD) is quickly closing the gap.
On May 5, AMD released its business results for the first quarter of 2026, which concluded on March 28. It became evident that the company is experiencing a surge in sales, particularly from its data center division. They plan to introduce their new MI450 chip later this year, which is on track to be their most successful AI product yet.
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AMD’s stock has shot up by 320% over the past year, but the pressing question is whether the current and future success of their data center business is already reflected in the stock price—or if there’s still more room for growth.
Focus on MI450 and Helios
A year ago, AMD launched its first GPU specifically designed for AI tasks, named MI300X. This product attracted many top-tier customers like Meta, Microsoft, and Oracle. Since then, they’ve released several other GPUs including the MI355X and MI440X, each showing notable improvements.
Looking ahead, AMD intends to begin shipping the MI450 series later this year, which includes customizable AI accelerators tailored for particular data center needs. This series will be offered with a fully integrated data center rack called Helios, which combines specialized software and networking hardware to optimize chip performance.
Remarkably, AMD claims that the MI450 series can deliver up to 36 times the performance compared to earlier GPU generations. This enhancement could be pivotal for AMD as they attempt to compete with Nvidia in the data center arena.
Moreover, AMD has made substantial strides in customer acquisition with its MI450 platform. They’ve signed agreements with both Meta Platforms and OpenAI to roll out 6 gigawatts of computing power over the next few years, starting with the MI450. CEO Lisa Su mentioned that there’s growing demand, as more companies inquire about large-scale deployments.
AMD’s data center revenue continues to soar
AMD reported a revenue of $10.3 billion in the first quarter, marking a 38% year-over-year increase. Notably, the data center segment alone contributed $5.8 billion, reflecting a staggering 57% growth—up from 39% just three months earlier, indicating robust momentum in AI chip sales.
As the MI450 shipments ramp up heading into 2027, CEO Su anticipates that AMD’s data center business will further accelerate, possibly growing at a compound annual rate of at least 80%. This means that this one area could generate tens of billions in annual revenue.
With demand for data center GPUs and accelerators consistently outstripping supply, AMD holds significant pricing power, pushing profit margins higher. Consequently, their non-GAAP earnings rose 43% year-over-year to $1.37 per share in the first quarter, a crucial metric for investors since earnings typically underpin stock prices.
AMD stock is certainly not cheap right now.
Currently, AMD’s adjusted 12-month earnings stand at $4.58 per share, leading the stock to trade at a price-to-earnings ratio of 92. This is nearly double the P/E ratio of Nvidia, which stands at 43.5.
I find it difficult to justify AMD’s high valuation when Nvidia, a well-established market leader, has a strong data center business that’s reportedly growing at a quicker pace, having achieved a 75% revenue increase in its last quarter.
However, projections from Wall Street suggest AMD’s earnings could reach $11.22 per share by 2027, resulting in a forward P/E of 37.5. If this estimate holds true, there might be potential for the stock to appreciate over the next 18 months.
Additionally, if AMD can indeed achieve Su’s goal of growing its data center business by more than 80% annually after 2027, then the stock could be viewed as undervalued at current prices as future profits become factored in for 2028 and 2029.
In summary, while AMD’s stock may seem overpriced at a glance, it could still yield positive returns for investors who are willing to hold onto it for the next three to five years.
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While there are no current positions disclosed, The Motley Fool holds positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. For more detailed information, check their disclosure policy.
