Advanced Micro Devices (NASDAQ:AMD) is a star among semiconductor equities this year. AMD stock is higher by nearly 68% year to date, while the widely observed PHLX Semiconductor Index is up “just” 37.50%.
Even with that impressive showing, AMD stock could offer those late to the party some upside from here because the shares reside nearly 13% below the 52-week high and have been mostly range bound over the past several months, indicating much of the good news surrounding this chip name has been priced into the shares.
AMD will have a chance to snap out of its recent range on Oct. 29 when the company delivers third-quarter results. Wall Street is expecting earnings of 18 cents a share on revenue of $1.8 billion, implying impressive year-over-year increases. More important than the third-quarter numbers will be AMD’s commentary on meeting, or better yet beating, 2019 and 2020 full-year earnings-per-share estimates of 62 cents and $1.05, respectively.
For investors to continue embracing AMD stock, earnings commentary must be bullish because the shares are still richly valued at above 30x forward earnings.
Since AMD is clearly smaller than rival Intel (NASDAQ:INTC) and often viewed as a more nimble company than its more mature rival, the former often commands premium valuations over the latter. And history has shown valuation-driven selling in AMD stock has often proven to be a buying opportunity.
Filter Out the Noise
AMD tussles with Intel in the personal computer and serve chip market and competes with Nvidia (NASDAQ:NVDA) in the graphics processing semiconductor arena. Due to the hyper-intensity of these markets, successful new product launches are integral to companies’ and investors’ success. AMD recently launched the Zen 2 family of 7 nanometer to compete with the 14 nanometer desktop chips made by Intel.
“Don’t be distracted by the [near-term] noise — AMD’s lineup of 7nm products has driven strong initial share gains while competitive road maps remain in flux, and console headwinds become tailwinds in 2020,” said Cowen analyst Matthew Ramsay in a recent note on AMD stock.
AMD claims the Zen 2 chips outperform comparable Intel offerings by 400% per dollar spent, giving the company a compelling argument to put to corporate IT buyers. Although it’s one data point, it’s meaningful for AMD stock because there was a time when the company competed with Intel solely on price. Now its competing on efficiency and performance and that’s more impactful than simply hawking the cheaper of two products on the market.
Gains in the desktop market are nice and can support AMD stock to some extent, but that market is more mature, putting some burden on chipmakers to capture victories in the server arena. AMD proven adept at that, recently inking deals with Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), the two giants of the fast-growing cloud computing industry.
Bottom Line: New Products, New Markets
In order to justify its rich multiples, AMD has to not only grow earnings and revenue, but infiltrate new markets with success.
“AMD is still able to develop differentiated products. Its accelerated processing unit integrates a CPU and GPU onto one piece of silicon,” according to a recent Morningstar note on AMD stock. “This enhances system performance by allowing the processors to run in parallel and thus more optimally. While Intel now incorporates graphics into its processors, AMD’s Radeon GPU is considered superior. AMD has also benefited from the adoption of its GPUs in cryptocurrency mining, though we view this exposure as relatively volatile.”
For investors that can withstand some near-term volatility in AMD stock, 2020 is poised to be a big revenue growth year thanks to new video game consoles using AMD chips coming late in the year. On that note, Google’s Stadia arcade platform, also using AMD chips, debuts next month, so 2020 will give investors a full year of data to digest on that catalyst.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
