Opinion: AMD’s inventory has been left behind, however not for lengthy — right here’s why

Whereas the iShares PHLX Semiconductor ETF
SOXX
and Nvidia Corp.
NVDA
have recovered from their Could swoons, Superior Micro Units Inc.
AMD
hasn’t but totally rebounded. This makes the inventory seem like one to personal, despite the fact that it’s up 517% since I final steered 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 rivals.

Key dynamics

Superior Micro Units designs central processing items (CPUs) and graphics processing items (GPUs) utilized in knowledge middle servers, PCs and videogame consoles. That makes it a play on two of the largest traits in tech proper now — migration to the cloud and videogame {hardware}. Traditionally, the corporate lagged Intel Corp.
INTC.
However it has now surpassed its rival due to progressive chip designs and manufacturing points at Intel.

Over the previous few years, AMD has rolled out extremely aggressive strains of chips, due to 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 sport. AMD’s EPYC sequence of processors for servers has been endorsed by broad utilization among the many foremost 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.

In addition to 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 via the usage of smaller, 7 nanometer transistors. Intel is caught again at 10 nanometers.

Right here’s the upshot in all of this: AMD is a strong play on the megatrend of cloud computing and the associated knowledge middle buildout. It’s a guess on the growing complexity of synthetic intelligence and large knowledge 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 Change later this yr. AMD can also be now a severe contender in PCs and notebooks.

“Our purpose at AMD is to actually be the chief within 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 development for the yr, up from prior steerage of 37% development.

“We consider this steerage needs to be simply attainable, significantly as Intel offers with manufacturing challenges,” says Morningstar analyst Abhinav Davuluri.

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

“We anticipate continued share development via the stability of the yr 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 record” of extremely favored corporations.

Right here’s how AMD stacks up in opposition to rivals by way of development in the latest quarter, revenue margins and valuation:


(FactSet)

Money and money move

Huge money positions and strong money move are positives for buyers as a result of they offer corporations freedom that comes from reliance on banks for financing. Robust money positions additionally help investor-friendly strikes, similar to buybacks and dividends.

Because of all the expansion, AMD’s money place rose sharply final yr to $2.3 billion, from $1.5 billion in 2019. AMD doesn’t pay a dividend, however its board lately accepted a big $4 billion share repurchase. As the corporate’s first massive return of money to shareholders, this represents about 4% of AMD’s market capitalization. It additionally alerts the corporate’s confidence in its enterprise and skill to proceed producing strong free money move regardless of rising issues about intensifying competitors, says Deutsche Financial institution analyst Ross Seymore.

Right here’s a take a look at AMD’s money place and money move  development, relative to rivals. The numbers for Marvell Know-how Inc.
MRVL
are via Jan. 30, 2021. The remaining are for the primary quarter:


(FactSet)

International attain

AMD books gross sales in lots of areas. That’s a constructive when international development is as sturdy as it’s now — lifted by $30 trillion in fiscal and financial stimulus worldwide. Huge publicity to China may very well be a threat due to U.S.-China tensions, however this difficulty appears to be diminishing a bit underneath President Biden, a minimum of to date.


(FactSet)

Inventory valuation and efficiency

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


(FactSet)

Wall Avenue’s opinion

As a bunch, Wall Avenue analysts are predicting the largest 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 odds for Nvidia, Broadcom Inc.
AVGO,
Marvell and Analog Units Inc.
ADI.
For buyers, 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 title.


(FactSet)

Dangers

One massive threat for AMD is that Intel phases a comeback, notes Tony Wang, a tech analyst at T. Rowe Value. Intel has achieved so earlier than. However AMD nonetheless has a couple of methods up its sleeve.

It 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 yr. 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 rivals together with Intel, says Jefferies analyst Mark Lipacis — one motive he has a “purchase” score and a $110 worth goal on the inventory.

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

Different dangers embody the cyclical nature of the chip trade and the unpredictable demand from shoppers and firms as financial development charges change. Yet one more risk is the broader adoption of competing chips based mostly on ARM (superior RISC machines) expertise.

Essential dates

July 26: Second-quarter earnings launch.

Oct. 25: Third-quarter earnings launch.

Michael Brush is a columnist for MarketWatch. On the time of publication, he had no positions in any shares talked about on this column. Brush has steered AMZN, GOOGL, MSFT, INTC and ADI in his inventory publication, Brush Up on Shares. Comply with him on Twitter @mbrushstocks

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