Investors perceived Advanced Micro Devices, Inc. (NASDAQ:AMD) for decades as the lower cost, and lower quality, alternative to Intel Corporation (NASDAQ:INTC). The decline of PCs hit AMD particularly hard. With years of losses mounting, many questioned its ability to survive. Now, as the company diversifies into artificial intelligence (AI), virtual reality (VR), and cryptocurrency, prospective investors in AMD stock will be buying into a revived and improved “other” company.
To be sure, AMD faces a different competitive landscape. Since PCs have declined in importance, AI, VR, and crypto have become some of the focal points.
With this technological shift, Nvidia Corporation (NASDAQ:NVDA) has supplanted both Intel and AMD as the semiconductor company of the future. Nvidia has made itself enough of a competitor that AMD agreed to an alliance with Intel. Such a partnership would have been unthinkable a few years ago. In January, Intel released an eighth-generation chip that incorporates AMD Radeon RX Vega graphics. And speaking of Intel, its traditional archrival Intel remains under the “specter” of a reputational “meltdown” due to flaws in its chips.
AMD has also carved out some profitable niches. It goes toe-to-toe with Nvidia regarding processing power with crypto. Many consider the AMD’s graphics processing unit (GPU) as the processor of choice for mining Ethereum with its lower cost, and hence, higher return. Crypto accounts for 6 to 8% of AMD’s revenue. However, when bitcoin fell 70% from its December 2017, the hype surrounding crypto declined. Cryptos have recovered somewhat, but where crypto prices (and by extension, demand for AMD GPUs) will land remains unclear.
The company has also earned much of its business in servers. Its EPYC processors have attracted the likes of Microsoft Corporation (NASDAQ:MSFT), Hewlett Packard Enterprise Co (NYSE:HPE), and Baidu Inc (ADR) (NASDAQ:BIDU).
Advanced Micro Devices Stock Recovery
All of these have led to Argus upgrading the stock to a buy, setting a target price of $18 per share. That represents a nearly 50% rise from the current AMD stock price. Despite playing catch-up, AMD accepted the competitive challenge. This response brought its stock back to life from the $2 per share doldrums of early 2016. The stock ended 2016 trading at over $11 per share.
After the run-up in 2016, AMD stock struggled throughout 2017. Still, the flat stock price growth might have been AMD stock taking a breather. Having recently achieved profitability, the stock now trades at 30 times forward earnings. Fortunately for AMD shareholders, consensus estimates show earnings will grow by 50% in each of the next two years. If predictions hold, the current AMD stock price, around $12 per share, places the price-to-earnings ratio at 16 times 2020 earnings.
Despite increasing earnings, AMD stock no longer remains a bargain. If looking for lower valuations, investors might do better to take Vince Martin’s recommendation on Micron Technology, Inc. (NASDAQ:MU). Micron’s current price places the stock at just under five times forward earnings. Still, other chip stocks trade at higher muliples. Nvidia’s PE stands at over 50. With 50% earnings growth and a 30 forward PE, investors can also make a good choice with a position in AMD stock.
Bottom Line on Advanced Micro Devices Stock
AMD remains the other chip company, yet its recovery has made it a better alternative. AMD came back from the dead by focusing on competing with Nvidia. Its lower-cost AI and VR chips have carved out profitable niches. Also, markets such as Ethereum and server processors that have attracted the interest of tech companies working to stage their own comebacks. It even formed a partnership with one-time competitor Intel to take on Nvidia.
Also, years of losses have been replaced by positive earnings and, at least for now, 50% annual profit growth. AMD stock has become too expensive to be considered “cheap.” Still, with 50% profit growth and lucrative niches forming, one should do well with a position in AMD stock.
As of this writing, Will Healy is long MU stock.
