Semiconductor stocks have been obvious winners in 2019, as the PHLX Semiconductor Index (NASDAQ:SOXX) has surged by almost 61% this year. But that feels like nothing when measured against the 150% returned by AMD (NASDAQ:AMD).
In theory, AMD’s massive 2019 rally makes forecasting similar gains for 2020 tricky. After all, the semiconductor space was the best-performing industry during the nearly completed decade. During the 2010s (through Dec. 21), the PHLX Semiconductor Index surged 377%, while the S&P 500 gained “just” 182%.
There’s another history lesson to go along with the performance of the chip stocks; when new decades start, the prior decade’s leaders often don’t perform that well.
That doesn’t mean that AMD and other chip stocks won’t generate good returns in 2020 or over the next ten years. But it does indicate that semiconductors won’t be the best-performing sector of the next decade.
All of that said, investors who missed out on the rally of AMD in 2019 don’t need to worry about the next decade. They simply need to evaluate whether the stock can build on its gains in 2020.
Although AMD stock is richly valued, it can advance in 2020. But investors shouldn’t expect the shares to double again because they probably won’t.
AMD Still Has Many Catalyst-Rich Name
Asking for AMD to duplicate its 2019 performance in 2020 is asking a lot. But the semiconductor maker has catalysts on its side entering the new year, including datacenter demand, a factor often mentioned in reference to AMD and its rival, Nvidia (NASDAQ:NVDA).
Citing robust datacenter demand, RBC analyst Mitch Steves recently reiterated his “outperform” rating on AMD stock while lifting his price target on the shares to $53, versus Friday’s closing price of $46.18.
“As data center demand ramps up and gaming sales come in better than feared, as we expect, this should lead to higher gross margins relative to current Street expectations,” said Steves in a note to clients. “Net net: we attempt to be ‘ahead of the curve’ and believe estimate raises for semiconductors broadly (and AMD) will begin in Q1.”
Bolstered by factors such as the growth of cloud computing, cybersecurity and the Internet of Things (IoT), the domestic data center market is expected to surge over the next several years, providing a sizable growth opportunity for AMD.
“The US datacenter market is expected to reach revenues of over $69 billion by 2024,” according to Research and Markets. “The growing popularity of Internet of Things (IoT) is a major driver for the growth of the US data center market. The country is one of the leading markets for IoT technologies, including IoT endpoints, IoT communication, IoT security, IoT data and analytics, and IoT artificial intelligence.”
Adding to the allure of AMD shares in 2020 is that the company’s processors will be found in both the PlayStation 5 consoles and the new Xbox consoles, which are due out late in the year. That positions AMD stock to benefit from what is expected to be a significant video game console upgrade cycle.
The Bottom Line: AMD Has Room to Run
AMD has proven adept at pilfering market share from its rival Intel (NASDAQ:INTC), not because of lower prices, but due to AMD’s superior innovation. AMD’s recently launched 7nm Ryzen, Radeon and EPYC processors helped the company realize record revenue in the third quarter.
The company’s ability to innovate and steal share from rivals, in part, explains the rich valuation of AMD stock, which is trading at 44 times analysts’ average 2020 earnings estimate. But AMD has some cards up its sleeve, making it a growth-at-a-reasonable price play.
“That being said, AMD is still able to develop differentiated products. Its accelerated processing unit integrates a CPU and GPU onto one piece of silicon,” said Morningstar in a recent note. “This enhances system performance by allowing the processors to run in parallel and thus more optimally. While Intel now incorporates graphics into its processors, AMD’s Radeon GPU is considered superior. AMD has also benefited from the adoption of its GPUs in cryptocurrency mining, though we view this exposure as relatively volatile,” it added.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
