Advanced Micro Devices (NASDAQ:AMD) is locked in a battle with arch-rival Intel (NASDAQ:INTC) for supremacy in the central processing unit (CPU) market. Shares of Advanced Micro Devices stock are trying to break out of a tight range. A favorable earnings report on Oct. 29 briefly took the AMD stock price to a 14-year high of $36.29.
For the quarter, AMD reported earnings of 18 cents per share which was above analysts’ expectations and generated $1.8 billion in revenue which was up 9% year-over-year. Revenue was in-line with analysts’ expectations but was the highest quarterly revenue since 2005. The company also recorded their best gross margin since 2012 (43%).
Where Will the Growth Come From?
Increased revenue should be a bullish signal for the AMD stock price. At least one analyst sees it that way. According to Patrick Moorhead, an analyst for Moor Insights & Strategy, AMD’s strong numbers were due in large part to their sales of 7-nanometer chips. These products include their Ryzen, Radeon and Epyc brands. “AMD is thriving,” said Moorhead. “Its PC group comprised of Ryzen processors and Radeon graphics led the charge with eye-popping 36% growth.
But investors in this sector will say once bitten, twice shy. In September 2018, AMD stock nearly doubled in a cryptocurrency bubble. However, only a month later, investors saw the AMD stock price nearly halve when the bubble burst.
I contend the growth that investors seek could be coming from e-sports.
Esports Market Continues to Grow
Electronic sports (or esports) is an industry that features organized events and tournaments that attract professional games. These tournaments ultimately lead to regional and even international championships. While this is definitely a niche market, it is one that continues to grow as the line between gaming and competitive sports begins to blur.
According to Statista, the esports market (which is still in its formative stage) generated $492.7 million in 2016. In 2020, that number may increase to nearly $1.5 billion dollars. Asia is the largest market for esports, with the U.S. coming in second.
AMD Provides the Technology Behind Esports
As you can imagine, esports at the professional level is a far cry from your home’s Microsoft (NASDAQ:MSFT) Xbox or Sony (NYSE:SNE) PlayStation. It requires incredibly powerful technology. AMD’s Ryzen processors and Radeon RX graphic cards help ensure the flawless performance that gamers demand. Their processors, including their newly launched Threadripper processor, allow gamers the flexibility they need when streaming their gameplay outside of competitive events.
In May 2018, AMD announced a partnership with Fnatic, a leading esports organization that will make AMD the organization’s exclusive hardware partner for motherboards, GPUs, CPUs and laptops. This partnership includes AMD’s Ryzen and Radeon brands. These are in the top tier of AMD’s product offering which should provide room for margins to continue to stay strong.
What’s Next for AMD Stock?
While analysts seem broadly confident about the long-term outlook for AMD stock, there is uncertainty in the near term. After the earnings report, the consensus price target is $34.63 (as of Nov. 11) which would be approximately 3.5% off from its current price (as of this writing) of $35.90.
But the consensus price target tells one story. Among analysts, the stock has a price target as low as $30 per share and as high as $52 per share.
Many of those analysts are concerned about the ongoing trade war and its potential effect on semiconductor demand in China. Plus, despite economic numbers that suggest the U.S. economy remains healthy, there is still concern about a recession in the next 12-18 months.
AMD stock, like the shares of other semiconductor companies, is cyclical in nature. When the economy is good, these stocks tend to perform very well. However, when the economy slows, the share prices will decline. These stocks also tend to be leading indicators. Demand for chips will slow or increase before the broader economy notices that change.
In esports AMD stock has a catalyst for growth. And while they will still have to compete with Intel in this space, there is plenty of room for both companies to thrive.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
