Opinion: AMD’s stock has been left behind, but not for long — here’s why


While the iShares PHLX Semiconductor ETF
SOXX
and Nvidia Corp.
NVDA
have recovered from their May swoons, Advanced Micro Devices Inc.
AMD
hasn’t but absolutely rebounded. This makes the stock appear to be one to personal, though it’s up 517% since I final urged it in February 2017, in contrast with good points of 80% for the S&P 500
SPX
and 140% for Nasdaq Composite Index
COMP.

Let’s check out why, and the way AMD stacks up in opposition to opponents.

Key dynamics

Advanced Micro Devices designs central processing models (CPUs) and graphics processing models (GPUs) utilized in information middle servers, PCs and videogame consoles. That makes it a play on two of the most important tendencies in tech proper now — migration to the cloud and videogame {hardware}. Historically, the corporate lagged Intel Corp.
INTC.
But it has now surpassed its rival due to revolutionary chip designs and manufacturing points at Intel.

Over the previous few years, AMD has rolled out extremely aggressive strains of chips, because of the management of CEO Lisa Su, who took the helm in 2014, says tech analyst Peter Karazeris at Thrivent. This put AMD again within the recreation. AMD’s EPYC collection of processors for servers has been endorsed by broad utilization among the many principal cloud suppliers — together with Amazon Inc.
AMZN,
Alphabet Inc.
GOOG,
Microsoft Corp.
MSFT,
Oracle Corp.
ORCL
and Tencent Holdings Ltd
TCEHY.
AMD’s Radeon GPUs for gaming {hardware} and its Ryzen line of chips utilized in PCs and laptops are equally profitable.

Besides higher chip design, AMD has pulled forward by drawing on superior manufacturing capabilities of Taiwan Semiconductor Manufacturing Co. Ltd.
TSM,
which might pack extra punch in chips by means of using smaller, 7 nanometer transistors. Intel is caught again at 10 nanometers.

Here’s the upshot in all of this: AMD is a stable play on the megatrend of cloud computing and the associated information middle buildout. It’s a wager on the growing complexity of synthetic intelligence and massive information analytics. And its GPU chips give Nvidia a run for the cash. That makes AMD a play on the brand new Xbox and Sony PlayStation console improve cycle and the potential launch of a brand new Nintendo Switch later this 12 months. AMD can also be now a severe contender in PCs and notebooks.

“Our goal at AMD is to really be the leader in the high-performance computing wave,” says Su.

She’s getting her method, and you may see the success within the numbers. First-quarter gross sales grew 93% year-over-year and 6% sequentially. AMD guided for 50% gross sales progress for the 12 months, up from prior steering of 37% progress.

“We believe this guidance should be easily attainable, particularly as Intel deals with manufacturing challenges,” says Morningstar analyst Abhinav Davuluri.

In CPUs, gross sales are rising quicker than these of the general trade, which tells us AMD is gaining share from opponents.

“We expect continued share growth through the balance of the year and into 2022,” says Goldman Sachs analyst Toshiya Hari, who has a purchase score and a $106 worth goal on AMD. The chip firm is on Goldman’s “conviction list” of extremely favored firms.

Here’s how AMD stacks up in opposition to opponents by way of progress in the newest quarter, revenue margins and valuation:


(FactSet)

Cash and money move

Big money positions and stable money move are positives for traders as a result of they offer firms freedom that comes from reliance on banks for financing. Strong money positions additionally help investor-friendly strikes, comparable to buybacks and dividends.

Thanks to all the expansion, AMD’s money place rose sharply final 12 months to $2.three billion, from $1.5 billion in 2019. AMD doesn’t pay a dividend, but its board just lately authorized a big $Four billion share repurchase. As the corporate’s first huge return of money to shareholders, this represents about 4% of AMD’s market capitalization. It additionally indicators the corporate’s confidence in its enterprise and talent to proceed producing stable free money move regardless of rising issues about intensifying competitors, says Deutsche Bank analyst Ross Seymore.

Here’s a take a look at AMD’s money place and money move  progress, relative to opponents. The numbers for Marvell Technology Inc.
MRVL
are by means of Jan. 30, 2021. The relaxation are for the primary quarter:


(FactSet)

Global attain

AMD books gross sales in lots of areas. That’s a constructive when world progress is as robust as it’s now — lifted by $30 trillion in fiscal and financial stimulus worldwide. Big publicity to China may very well be a threat due to U.S.-China tensions, but this difficulty appears to be diminishing a bit underneath President Biden, not less than to date.


(FactSet)

Stock valuation and efficiency

By most measures, AMD is the second-priciest stock in its group. But given the expansion, it’s justified.


(FactSet)

Wall Street’s opinion

As a gaggle, Wall Street analysts are predicting the most important good points for AMD, amongst all the businesses in its house. It’s additionally notable that solely 61% of analysts have a purchase score, decrease than the chances for Nvidia, Broadcom Inc.
AVGO,
Marvell and Analog Devices Inc.
ADI.
For traders, it is a constructive as a result of it tells us there’s extra room for sell-side analysts to show bullish and drive their purchasers into the identify.


(FactSet)

Risks

One huge threat for AMD is that Intel levels a comeback, notes Tony Wang, a tech analyst at T. Rowe Price. Intel has executed so earlier than. But AMD nonetheless has just a few tips up its sleeve.

It just lately launched a extra superior model of its EPYC processor, codenamed Milan. This line of server chips will ramp up gross sales within the second half of this 12 months. AMD is making the leap to much more environment friendly 5 nanometer manufacturing with a line of chips dubbed Genoa, slated for launch in 2022. These two rollouts will permit AMD to proceed its market-share good points in opposition to opponents together with Intel, says Jefferies analyst Mark Lipacis — one purpose he has a “buy” score and a $110 worth goal on the stock.

AMD can also be rolling out next-generation GPUs primarily based on its Compute DNA (CDNA) chip structure, for use in information facilities. And AMD’s merger with Xilinx Inc.
XLNX
later this 12 months ought to assist AMD produce much more refined chips by incorporating Xilinx’s field-programmable gate array (FPGA) capabilities into its chip designs. FPGA provides prospects extra leeway to customise chips for their very own wants.

Other dangers embody the cyclical nature of the chip trade and the unpredictable demand from shoppers and corporations as financial progress charges change. One extra risk is the broader adoption of competing chips primarily based on ARM (superior RISC machines) expertise.

Important dates

July 26: Second-quarter earnings launch.

Oct. 25: Third-quarter earnings launch.

Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any shares talked about on this column. Brush has urged AMZN, GOOGL, MSFT, INTC and ADI in his stock e-newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks



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