Why Bulls Are Still in Control With AMD Stock

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When Advanced Micro Devices (NASDAQ:AMD) touched $28 this past August and again earlier this month, the mild correction proved short-lived. Advanced Micro Devices stock has plenty of continued upside gains ahead. Analysts are jumping aboard as they start to believe in the chip supplier. The company earned a pair of “buy” calls (per Tipranks) in the last month.

At This Point, the Smart Move for AMD Stock Is to Wait

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Even though the quarterly earnings AMD just released are mixed, strong EPYC and Ryzen sales will continue over the next few years. This is not just a short-term rebound.

AMD’s Mainstream GPU Release

On Oct. 7, AMD announced the Radeon RX 5500 series, capping the summer’s slew of product releases. The GPU has the same RDNA architecture as AMD’s flagship RX 5700 but has notable differences. It is built on the smaller Navi GPU.

In effect, AMD is bringing the latest technology advancements to the mainstream video market. By making the RX 5000 series available on the laptop market, AMD widens its customer reach. Gamers continue to shift from the PC (and the RX 5500) to the mobile form factor (called the RX 5500M) for their gaming needs.

AMD’s affordable, entry-level GPU will face head-to-head against Nvidia’s (NASDAQ:NVDA) GTX 1650. The card will have specifications similar to its more expensive RX 5700, except that it will have 22 compute units instead of 36 or 40 in the case of the RX 5700 and RX 5700 XT, respectively. Although the budget card will probably retail for around $149, AMD may make up for the lower margins through higher volume sales.

Competitor’s Strong Quarterly Earnings

Intel’s (NASDAQ:INTC) Q3 beat and upside Q4 guidance is a potential setback for the AMD stock price. Investors had confidently expected AMD’s EPYC server CPU and Ryzen desktop and mobile PC solution would take away Intel’s market share. Instead, Intel raised its Q4 revenue guidance, forecasting $19.2 billion in revenue and an EPS of $1.24. The consensus estimate for revenue was $18.83 billion and an EPS of $1.21. Intel, besides paying a dividend that yields around 2.2%, will also buy back $20 billion worth of shares.

Either the server and desktop market is big enough for Intel and AMD to thrive or AMD’s market share growth is slowing. Yet if Mobileye explains Intel’s growth, AMD’s unit sales growth may accelerate over the next few quarters.

Q3 2019 Financial Summary

On Oct. 29 after the market closed, AMD reported Q3 non-GAAP EPS of 18 cents. Revenue rose a modest 9.1% year-on-year to $1.8 billion. Gross margin rose 3% to 43%, driven by increased sales in Ryzen and EPYC processors. After having an operating cash flow of $234 million and $179 million in free cash flow, AMD ended the quarter with $1.2 billion in cash, cash equivalents, and marketable securities.

In Q4, AMD forecasts revenue of ~$2.1 billion and a gross margin of 44%. For FY 2019, revenue will grow in the mid-single-digit percentage year-over-year.

Valuation and Takeaway on AMD Stock

The average price target on AMD stock is $33.50. Analysts may think AMD stock price has a limited upside due to valuations. So, if Texas Instruments (NASDAQ:TXN) faces a near-term slowdown, AMD and any of the chip suppliers could face unpredictable short-term headwinds, too.

Cautious investors may build a conservative 5-year EBITDA Revenue exit model on finbox.io. There, investors will find the stock is still undervalued, but only if the company’s revenue is growing in the double-digit rate annually at the very minimum.

As of this writing, the author did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


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