AMD (NASDAQ:AMD) has risen dramatically in 2019. AMD stock was up 149% during 2019.
Part of the reason was its huge market share gains for its 7 nano-meter chips, especially the Ryzen chipset lines, including the 7 and 9 series chips. But how did this happen, and why? And will the AMD stock price gains be short-lived? Moreover, can AMD sustain its market share gains?
Taking a step back, AMD’s market share gains against Intel (NASDAQ:INTC) did not occur all of a sudden. The Financial Times published a very insightful article this summer that describes how AMD pulled this off.
In the article, “AMD Looks To Build On Chips Advantage in Intel Fight,” Richard Waters, the author, shows how and when AMD’s comeback story began.
In fact, at one point less than four years ago, AMD stock had fallen below $2.00 per share. Moreover, at one point AMD had to sell and leaseback its headquarters building just to raise cash.
But then, Waters argues, a new CEO, Lisa Su, took some chances. She is a former IBM executive who brought along another IBM technology exec, Mark Papermaster, the new CTO at AMD. They decided that AMD needed to redesign its chipset products from the ground up.
They started designing chips anticipating the needs of clients in the future. That led to a technology lead over Intel when those forecasts worked out. In addition, Intel had a slip up in its engineering, according to Waters.
How AMD Stock Will Benefit
So as it stands, the Ryzen chip is the only 7-nanometer size (smallest shrunk chipset) on the market. This is a huge advantage over Intel.
The Financial Times article describes how numerous large cloud companies are now starting to use AMD chips.
In short, it appears that AMD is starting to convert the technology lead into a sustainable business edge. In addition, it doesn’t hurt that there has been a CPU chip shortage for the past year. That has started to push prices up as well.
Moreover, AMD is now projecting that its free cash flow is going to be positive for all of 2019. It also expects to gain mid-single gains in revenue for all of 2019.
Analysts expect 2020 will show considerable gains as well. Analysts in Seeking Alpha’s database estimate that 2020 revenue will be $8.59 billion, up 28% from $6.71 for 2019. That puts AMD stock at less than 6 times sales.
Moreover, analysts project earnings per share of $1.1o for 2020. That puts AMD stock on just 42 times earnings. That’s expensive but not dramatically so for such a fast-growing company, especially if its market share gains are sustainable.
What Should Investors in AMD Stock Do?
I wouldn’t be surprised if AMD stock takes a breather for the next six months or so. However, by the time analysts are projecting 2021 revenue and earnings, you might see another large increase in the AMD stock price.
This is not a stock for value investors. In fact, Intel is probably much more a play for that kind of investor.
But AMD’s technology lead may convert into large new cloud data center client gains and other market share gains. That could lead to a continuing sales rebound for AMD.
You might be able to stomach the kind of volatility with this technology stock. Any earnings or sales miss could cause a hiccup in AMD’s stock price. If not, take a look at Intel, and see if they are a better bet in the semiconductor sector.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
