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Developing artificial intelligence (AI) software requires an astronomical amount of computing power, which is why most of it happens inside large, centralized data centers fitted with thousands of specialized chips called graphics processing units (GPUs). Nvidia leads the market for data center GPUs, but Advanced Micro Devices (NASDAQ: AMD) is quickly catching up.
AMD released its operating results for the first quarter of 2026 (ended March 28) on May 5, which revealed accelerating revenue growth led by the data center segment. Later this year, the company will start shipping its new MI450 chip, which is already shaping up to be its most commercially successful AI product to date.
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AMD stock has exploded higher by 320% over the last 12 months, so is the present and future success of its data center business already priced in, or is more upside ahead?
AMD launched its first data center GPU specifically for AI workloads in 2023. It was called the MI300X, and it attracted many of Nvidia's top customers, including Meta Platforms, Microsoft, and Oracle. The company has since launched several new GPUs, including the MI355X and the MI440X, with each being more performant than the last.
But at the end of this year, AMD will start shipping a new generation of chips called AI accelerators, which can be customized to suit the needs of specific data center operators. They have been labeled the MI450 series, and they will be available as part of a fully integrated data center rack called Helios, which includes specialized software and networking hardware to extract the best performance from every chip.
In fact, in that configuration, AMD says the MI450 series will deliver a staggering 36 times more performance than its previous generation of GPUs. As a result, this new platform might bring the company another step closer to matching Nvidia in the data center market.
AMD has already locked in some huge customer wins for the MI450 platform. It signed deals with Meta Platforms and OpenAI, which will each deploy 6 gigawatts worth of computing capacity over the next few years, starting with the MI450. But AMD CEO Lisa Su says demand continues to strengthen, with a number of new customers inquiring about large-scale deployments.
AMD generated $10.3 billion in revenue during the first quarter, which was a 38% increase from the year-ago period. But the data center business, specifically, contributed $5.8 billion in revenue, which was up by a whopping 57%. That marked an acceleration from the 39% growth it delivered in the fourth quarter of 2025 three months earlier, highlighting the significant momentum in AI chip sales.
But as MI450 shipments ramp up into 2027, Su believes AMD's data center business will start growing at an even faster compound annual rate of at least 80%. That will mean tens of billions of dollars in annual revenue from this one segment alone.
Given that demand for data center GPUs and accelerators continues to outstrip supply, AMD has an incredible amount of pricing power, which is boosting its profit margins. As a result, the company's non-GAAP (adjusted) earnings jumped by 43% year over year during the first quarter, coming in at $1.37 per share. Earnings typically drive stock prices, so this is a very important metric for investors.
Based on AMD's adjusted trailing-12-month earnings of $4.58 per share, its stock is trading at a price-to-earnings (P/E) ratio of 92. That means it's nearly twice as expensive as Nvidia stock, which trades at a P/E ratio of 43.5.
In my opinion, AMD's premium valuation is very difficult to justify, considering Nvidia is not only the market leader, but also that its data center business is growing at a faster pace, with its revenue jumping by 75% during its last reported quarter.
But Wall Street expects AMD to grow its earnings to $11.22 per share in 2027 (according to Yahoo! Finance), placing its stock at a forward P/E ratio of 37.5. Assuming that estimate proves to be accurate, it potentially leaves some room for upside in the stock over the next 18 months or so.
Moreover, if Su maintains her view that AMD will grow its data center business by more than 80% per year beyond 2027, then its stock might actually look cheap at the current price once investors start pricing in forward earnings for 2028 and 2029.
As a result, AMD stock might be expensive at face value right now, but it can still deliver positive returns for investors who are willing to hold it for the next three to five years.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Advanced Micro Devices (AMD) Stock After Its 12-Month Gain of 320%? was originally published by The Motley Fool