The story behind the multi-year rally of Advanced Micro Devices (NASDAQ:AMD) stock is pretty simple.
The very large, steadily growing computer-processing unit (CPU) market had long been dominated by Intel (NASDAQ:INTC). But, over the past few years, AMD has made significant inroads against Intel, leveraging superior technology and quicker-to-market product times to expand its CPU market share significantly. This market share expansion has led to consistently robust revenue, margin, and profit growth by AMD – and all that growth has powered AMD stock from $2 in 2015 to $30 today.
The reason why AMD stock should stay in rally mode for the foreseeable future is equally simple: the company’s CPU market share continues to increase. Consequently, its profits will grow for the foreseeable future, resulting in healthy gains by AMD stock.
Worries over the valuation of AMD stock become a problem from time to time. That’s why AMD stock price has been stuck in neutral over the past four months. But these worries don’t end the rallies; they are just put on pause. As long as AMD looks poised to continue to gain market share, Advanced Micro Devices stock will continue to climb.
There are two pieces of good news for AMD stock. One is that it still looks poised to continue to gain market share. Two, the worries about its valuation which have plagued the shares over the past four months are largely in the rear-view mirror.
As a result, AMD stock looks ready to start climbing again soon.
AMD’s Market Share Continues to Climb
Four years ago, AMD was a relatively unknown player in the very large and rapidly growing CPU market, which was overwhelmingly dominated by Intel. Since then, AMD has consistently launched next-generation products before Intel. Consequently, the CPU market is now flooded with higher-performance AMD products. This significant transformation has led to AMD gaining huge market share over the past several years, growing its slice of the CPU market by several percentage points during that stretch.
AMD’s market share continues to expand today. Most recently, Microsoft (NASDAQ:MSFT) announced that the 15-inch model of its Surface Laptop 3 would include AMD’s Ryzen Processors, instead of Intel’s processors. That’s a significant move, considering that Surface laptops have historically been powered by Intel processors and have not included AMD processors. This is yet another sign that AMD’s CPUs have become increasingly competitive with those of Intel.
There have been multiple, positive signs like this over the past several years. As a result, it’s become clear that – unless Intel does something huge – AMD’s market share expansion will continue to climb. Intel isn’t planning to do anything big anytime soon, outside of large price cuts.
So , for the foreseeable future, AMD’s market share should continue to rise. As long as that remains the case, AMD stock should head higher.
Advanced Micro Devices Stock Isn’t Overvalued
AMD is gaining share of the semiconductor industry whose revenues have steadily grown at a 5% compounded annual rate over the past two decades. Consequently, AMD’s revenue looks poised to increase at least 10% per year. Moreover, AMD’s market share gains will give it more pricing power, causing its gross margins to climb. Additionally, its costs per product sold will drop.
Given these dynamics, AMD should report double-digit-percentage revenue growth over the next several years, while its margins should climb meaningfully. As a result, its profits will jump 20%-plus, powering AMD stock price higher in the long run.
Today AMD stock does not reflect its upcoming 20%-plus profit growth. I estimate that AMD’s fiscal 2025 earnings per share will be $2.70. Based on a forward earnings multiple of 20, which is average for growth stocks, and a 10% discount rate, that equates to a FY19 price target for Advanced Micro Devices stock of over $33.
AMD stock trades hands slightly above $30 today. Thus, AMD stock is both supported by non-cyclical growth drivers and slightly undervalued at current levels. That’s an attractive combination.
The Bottom Line on AMD Stock
A good rule of thumb is that, as long as AMD’s market share keeps rising, stick with AMD stock. Another good rule of thumb is buy AMD stock when it is undervalued relative to the company’s long-term profit growth prospects.
Right now, AMD’s market share is rising and AMD stock is trading below its fair value. So now is a good time to buy Advanced Micro Devices stock.
As of this writing, Luke Lango was long AMD and INTC.