It’s been a bumper year for Advanced Micro Devices (NASDAQ:AMD). The shares of AMD stock are up more than 120% so far this year, easily outpacing the broader market. The semiconductor’s year-long rally has survived a great deal of skepticism from bears who say the chip maker’s meteoric rise won’t last and this week’s latest chip release proved bears wrong once again.
If you spent 2019 on the sidelines and missed AMD’s impressive growth, all’s not lost. Advanced Micro Devices looks likely to deliver in the year to come as well. The firm’s semi-custom chip segment has underperformed so far this year and management warned that more of the same is likely to finish out the year.
However, 2020 should see demand pick up significantly for semi-custom chips as new gaming consoles hit the market. Both Sony and Microsoft use AMD chips in their latest console models. This year console purchases were significantly lower as gamers waited for new models to come out. That should help boost AMD stock into 2020 as semi-custom sales make up roughly 30% of the firm’s revenue.
Size Isn’t Everything
One of the arguments against AMD stock has been the firm’s size. Advanced Micro Devices is considerably smaller than competitors, like Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA), something bears say will work against the firm in the long-term. Both NVDA and INTC have deep pockets that afford them bigger R&D budgets as well as better price leverage.
While that’s certainly something to consider, AMD stock doesn’t appear to be held back by its size. The firm has been able to grow its market share in the CPU market for eight consecutive quarters and its data center business has also been gobbling up share. Nomura’s David Wong says AMD is on track to double its market share in the data center space by mid-2020.
AMD beat Intel to market with its 7-nanometer chips, putting the firm an entire year ahead of INTC. That’s a huge advantage in the tech space where most firms are likely to opt for the latest version.
AMD’s launch Tuesday of its 7-nanometer graphics card was met with enthusiasm from both investors and analysts. Over the next six months, Advanced Micro Devices is planning to launch more 7-nm products that are expected to give a significant boost to the firm’s bottom line. Analysts at Cowen told clients the line of products will, “drive above-consensus growth, share gains, margin expansion and AMD share appreciation.”
Of course, AMD will have to execute — the launch of the 7-nm chips needs to be without issue in order for the firm to maintain it’s lead on Intel and continue gaining trust from potential customers.
How to Value AMD Stock Here
After AMD stock’s run-up in recent weeks, there’s no denying that the share price is no longer cheap.
For the growth and potential that investors are acquiring, the share price isn’t outrageous. AMD trades at 66 times its future earnings, much higher than NVDA and INTC, which trade at 37x and 12x their future earnings, respectively.
To be sure, Advanced Micro Devices also has a much more favorable position for the coming year, which is why investors are willing to pay a premium. Right now, AMD’s gross profit margin stands at just 41% compared to NVDA and INTC’s which both come in slightly below 60%. But that AMD figure should rise over the next year as the new line of 7-nm chips launches.
Bottom Line on Advanced Micro Devices Stock
Advanced Micro Devices stock looks likely to continue delivering over the next year and beyond. Long term investors may want to consider starting to build a position. As AMD recently spiked when the new chips launched, it could be prudent to hold off, or at least start small. That’s because although AMD’s overall growth trajectory looks positive, the firm is likely to experience some turbulence, particularly in Q4 with semi-custom sales still depressed.
There will likely be some profit taking over the next few days and the stock could also react to negative news regarding the trade deal with China. However, as a long-term pick AMD stock looks like a winner even at its current price.
As of this writing, Laura Hoy was long AAPL and IBM.