Investors have nothing but praise for Advanced Micro Devices (NASDAQ: AMD). AMD stock is up 85% YTD, easily outpacing Nvidia Corporation’s (NASDAQ: NVDA) 34% gain.
Although Intel (NASDAQ: INTC) is in an uptrend that happens ahead of every earnings report, the stock is only up 12.76% YTD. AMD clearly stands out among the CPU and GPU chip suppliers and promises more upside for the rest of the year.
AMD’s resurgence in graphics and CPU space comes at the right time. Both markets demand higher performance gains and AMD is delivering. Its GPU division released the powerful Radeon 7. Navi runs on GPUs manufactured under the 7nm process.
AMD’s Ryzen is already at the third generation and brings the 7nm Zen 2 architecture to the mainstream for the first time. Most significantly, it is available for consumers ahead of any of Intel’s chip offerings. Delays in introducing Intel’s 10nm Cannon Lake chip are clearly a problem that benefits AMD.
AMD Pushes the Envelope
AMD’s refreshed Ryzen brings the 16-core and 32-thread process to the mainstream through the Ryzen 9 3950X. At the low end, the Ryzen 3 3300G and Ryzen 5 3400G bring powerful integrated graphics. Importantly, if AMD wins more market share in the budget gaming space, its profit margins will grow.
The latest GPU product refresh introduces microarchitectural advances AMD dubs as RDNA. Combined with Zen 2, chiplet and die stacking, and heterogeneous platforms, the company is positioned to deliver high-performance solutions.
In the enterprise market where profits are bigger, AMD’s EPYC refresh has a number of notable improvements. This will likely lead to more customer wins. The second-generation EPYC has up to 64 cores per package, double from that of the last generation. The package offers significantly more compute.
And by offering greater configuration options, more customers may opt for AMD EPYC. As customers switch from Intel’s aging Xeon chips to EPYC, AMD’s market share will grow. Markets already notice the potential for AMD to accelerate its market share growth. The stock closed at $34.11 recently as shares sustained an unbroken uptrend that began after the Q4/2018 market sell-off ended.
To power the exascale era, AMD’s combined EPYC CPU and Radeon Instinct GPU solution promise to deliver over 1.5 exaFLOPS of computing power. This level of supercomputing ensures AMD will lead in the interconnects for system performance.
Competition for AMD’s GPU
On July 9, Nvidia launched the GeForce RTX 2060 Super and RTX 2070 Super, priced at $399 and $499, respectively. These graphics are offer ray tracing but are priced higher than AMD’s Radeon 5700. Two days before the release of the 5700 and 5700 XT, AMD cut their prices.
Nvidia’s Super GPUs offered better performance over AMD’s Radeon. To avoid a disappointing launch AMD had to cut prices to compete. Although this may put pressure on profit margin, expect strong unit volume sales on launch. The more cards AMD sells, the faster component prices fall, slowing any potential profit margin declines.
Valuation on AMD Stock
Investors may assume revenue growth of at least 15% in a five-year DCF revenue exit model. This forecast assumes continued market share gains over Intel, consistently growing demand for Ryzen CPUs, and strong enterprise sales driven by EPYC. In that scenario, AMD stock is worth around $36. At a 4.4 times revenue exit multiple, the stock has a fair value of ~$40.50.
When AMD reports quarterly earnings on July 30, the stock could risk dipping. Profit-taking following strong results or a drop due to results missing expectations is a possible scenario. Either way, AMD’s long-term growth prospects are strong that any blip creates a buying opportunity for technology investors.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.