AMD Just Joined the $1 Trillion Club. Here's Why Investors Are Betting Big on the Chipmaker.

Advanced Micro Devices (NASDAQ:AMD) hit a major milestone on Sept. 21, surpassing the $1 trillion market capitalization mark. AMD becomes the fourth chipmaker in the rarefied club, joining Nvidia, Broadcom, and Micron Technology.

AMD shares have been on a huge run, jumping 187% so far this year and 23% in the last week as the semiconductor sector rebounds. And while the company has long toiled in Nvidia's formidable shadow, investors are finding plenty to like about the company and its role in the growth of artificial intelligence.

Image source: AMD.

What does Advanced Micro Devices do?

AMD, as it's called, is much more than a Nvidia competitor. The California-based company makes a wide range of high-performance processors, including graphics processing units (GPUs) and central processing units (CPUs), with widespread applications in personal computers, gaming devices, and, of course, data centers.

And it's the data center business that is helping AMD soar to new heights. Data center revenue in the second quarter was $6.7 billion, up 107% from a year ago. Management attributed the gains to strong demand for the company's EPYC server CPUs and its Instinct GPUs.

On top of that, AMD offers its Helios fully integrated, rack-scale AI systems that operate on 72 Instinct accelerators and 18 EPYC CPUs.

"We enter the second half with strong momentum as EPYC demand accelerates, Instinct deployments scale, and Helios begins to ramp," CEO Lisa Su said. "More broadly, AI is driving a significant expansion in demand for compute across all of our markets, and our leadership portfolio and growing customer visibility position us exceptionally well to capture this expanding opportunity and deliver substantial revenue and earnings growth in the years ahead."

AMD says major AI companies, including Meta Platforms, Microsoft, Oracle, OpenAI, and Anthropic, are already using the Helios system.

The numbers help tell the story

AMD doesn't reach Nvidia's sales level, but it's ramping up quickly. Overall revenue in Q2 was $11.53 billion, up 50% from a year ago. The company had net income of $2.29 billion, up 163%, and diluted earnings per share of $1.38, up 156% from last year.

Just as importantly, AMD's profit margin is growing. Gross margins in Q2 were 54%, up from 40% in the same period a year ago. Management says it expects data center revenue to accelerate further in the second half of the year, allowing earnings to expand.

The fourth member of an impressive club

Achieving a $1 trillion market cap is rare -- fewer than 20 companies in the world have made that lofty mark. But it's no coincidence that chip companies are well-represented in the club.

Nvidia, with its leading position in GPUs and high-level processors, has become the most valuable company in the world. Broadcom's custom-made processors designed for specific customers and workloads have gained in popularity, and Micron gained even more than AMD so far this year, as its storage, including its data storage chips and computer memory products, is in as much demand as processors.

AMD data by YCharts

And it appears that AMD is just getting started. OpenAI and Meta Platforms have both committed to multiyear agreements with AMD, each planning to deploy up to 6 gigawatts of AMD GPUs. The agreements signal that big tech companies recognize AMD as a larger supplier for AI. That helps explain why the stock price has increased nearly three times as much as AMD's revenue in the last year -- investors are willing to pay more for AMD's anticipated future earnings.

The $1 trillion valuation is a milestone that reflects the market's lofty expectations.

Patrick Sanders has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.