The PHLX Semiconductor Sector Index (SOX) is higher by 48.1% year-to-date. That sounds good on its own, and it is, but one of the benchmark’s components, AMD (NASDAQ:AMD), has returned nearly 32% over just the past month.
AMD stock’s recent surge extends its 2019 gain to over 121%. Let’s see here: up 32% over a month and more than double in just over 10 months. Yes, there are reasons to be cautious with any stock after runs like those, and while stocks don’t move up in straight lines, there are supporting factors for more upside in AMD stock.
As just one example, shares of AMD jumped 3.42% on Monday, Nov. 18 on volume that was more than 25% above the daily average. Those are the type of volume spikes some traders use to confirm the credibility of technical breakouts.
Another thing about breakouts is how the stock acts after those technical events occur. So far, so good for AMD stock. On Tuesday, Nov. 19, shares surged 3.54% on volume of 94 million shares, well above the daily average of 51.92 million. Predictably, analysts, who were already mostly bullish, are now fawning all over AMD stock.
On Tuesday, Wells Fargo analyst Aaron Rakers boosted his AMD price target to $48 from $40, saying “We continue to see AMD’s wins in [High Performance Computing] / supercomputing as increasing validation of the company’s strong competitive positioning in datacenter CPUs…thus remaining supportive of our positive upside thesis.”
Joining the Party
Rakers’ boosted price target was revealed a couple of days after Cowen analyst Matthew Ramsay lifted his forecast on the stock $47 from $40 and that was after RBC Capital Markets analyst Mitch Steves went to $50 from $44 on AMD.
Even if those three analyst estimates are averaged, arriving at $48.33, that still represents upside of 17% for AMD stock from the Nov. 19 close. Much of the ebullience surrounding AMD stock is supported by favorable fundamentals, including the expanding Graphics Processing Unit (GPU) market, a factor that’s also boosting shares of AMD rival Nvidia (NASDAQ:NVDA).
The global GPU market “is expected to reach $157.1 billion by 2022, growing at a CAGR of 35.6% during the period, 2016-2022,” according to Allied Market Research. “The demand for the GPU market is expected to rise during the forecast period across the globe. It is due to constant changes in the graphic games, augmented reality (AR) & virtual reality (VR) gaining traction, and artificial intelligence (AI). However, inability of integrated GPU to facilitate intensive graphic designing software restrain the market growth.”
AI advancements are highly reliant on semiconductors, boding well for players such as AMD and Nvidia.
“Many AI applications have already gained a wide following, including virtual assistants that manage our homes and facial-recognition programs that track criminals,” according to McKinsey. “These diverse solutions, as well as other emerging AI applications, share one common feature: a reliance on hardware as a core enabler of innovation, especially for logic and memory functions.”
Another booming market – that being PC and console video games – is an important driver of the AMD thesis. The company’s recently launched third generation Ryzen chip, the Ryzen 5 3600X, is viewed as favorably priced, having some perks over comparable Intel (NASDAQ:INTC) chips and as a solid idea for gaming newbies.
Gaming is another signature growth frontier for AMD, a market it has an established footprint in. Global video game revenue is poised to top $150 billion this year and continue rising from there.
Bottom Line on Advanced Micro Devices Stock
AMD finds itself involved in some fast-growing markets and investors will pay up for the privilege of accessing that growth. The shares trade for almost 38x forward earnings. On that basis, AMD stock is pricier than both Intel and Nvidia, but that’s not an indictment.
Rather, AMD’s growth may just be worth the price of admission because the company is among the best-managed in the semiconductor industry, as evidenced by its moves to reduce dependence on personal computing revenue.
“We concede that AMD’s recent CPUs and GPUs have been more competitive with offerings from Intel and Nvidia, respectively, and AMD has begun generating solid growth as a result,” said Morningstar in a recent note. “Additionally, AMD supplies semicustom chips such as those for game consoles PlayStation 4 and Microsoft Xbox One, which has helped generate much-needed cashflow in recent years. Based on AMD’s product pipeline, particularly on the CPU side, we think the firm is better positioned than it has in over a decade.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.