The burgeoning field of artificial intelligence (AI) has become a major driver for business growth and, consequently, a significant catalyst for the stock market. Projections from IDC estimate that spending on AI, encompassing both infrastructure and business services, will reach a staggering $632 billion by 2028. AI promises to revolutionize business operations and boost labor productivity, but this will require substantial investment in advanced chips to make AI smarter. Several leading chip companies are well-positioned to benefit from this trend, potentially offering substantial returns for investors. Here are two such stocks, with the potential for significant upside based on analyst price targets.
Advanced Micro Devices
Advanced Micro Devices (AMD) has long been a key player in the chip market, particularly renowned for its graphics processing units (GPUs), though it has often played the runner-up to Nvidia. However, AMD remains a major supplier of general-purpose GPUs. The average analyst price target for AMD is $148.34, implying a potential upside of 51% based on its recent share price of approximately $98.
In 2024, AMD achieved a 14% year-over-year revenue increase, with non-GAAP (adjusted) earnings per share growing by 25%. The company has realized strong demand for its Ryzen central processing units (CPUs), as well as GPUs for data centers. AMD’s data center business accounted for half of its total revenue of $25.7 billion last year.
Analysts expressed some disappointment, however, that AMD did not provide specific revenue guidance for its data center GPUs in its fourth-quarter earnings report, having offered specific guidance throughout 2024. This prompted some analysts to interpret it as a signal of potentially weaker sales momentum in the near term. Furthermore, revenue in gaming and other markets experienced weakness. There are also uncertainties surrounding the potential impact of tariffs on the chip industry. However, AMD’s conservative valuation may already reflect this risk.
Despite these concerns, optimism remains as management has touted significant customer interest in its upcoming Instinct MI350 GPUs, slated for release later this year. AMD’s stock currently trades at a forward price-to-earnings (P/E) multiple of 21, considered modest for a growing chip enterprise, which could support the stock regaining ground toward its targeted price within the next year or so.
Arm Holdings
Another company poised to benefit from the AI boom is Arm Holdings. Arm designs chips that are used in virtually every smartphone and cloud computing system, among other markets. Although the stock has retreated 40% from its recent highs, Wall Street analysts are still bullish on its growth prospects, with an average price target of $158.43, which suggests a 41% upside from its recent share price of approximately $112.
Arm-based processors are exceptionally sought after due to their competitive cost and high energy efficiency. This positions Arm well amidst the increasing costs associated with investing in AI infrastructure, as well as the escalating power demands of large data centers.
Arm recorded a 19% year-over-year revenue increase, reaching $983 million in the most recent quarter. Revenue is generated from royalties and licensing fees, which enables the company to convert a substantial portion (over half) of its revenue into free cash flow. As more products and devices become technologically advanced, with AI becoming a more prominent focus, Arm’s strong presence in edge computing markets, including the Internet of Things, smart home devices, and self-driving car systems, should give it a major opportunity for expansion.
The primary challenge that might prevent Arm from achieving the consensus price target in 2025 is its current valuation. The stock trades at an expensive 191 times free cash flow and 148 times earnings. Using 2026 earnings estimates, the stock still seems fully valued at 55 times forward estimates. This high valuation explains the volatility the stock has experienced over the past year, even with solid demand for Arm-based processors. Investors might see limited gains in 2025, pending the company’s growth aligning with its high earnings multiple.
