The Cloud Computing Surge Is Good News for Advanced Micro Devices Stock

The rise in cloud computing is good news, but AMD could see a delay in the expected revenue bump from next-gen game console releases

Advanced Micro Devices (NASDAQ:AMD) was one of the star stock market performers of 2019, posting gains of over 150% on the year. Up until the point where the markets crashed, AMD stock was going gangbusters in 2020 as well. It closed at an all-time record high of $58.90 on Feb. 19, for a 28% gain in just the first two months of the year.

The Cloud Computing Surge Is Good News for AMD Stock
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While the novel coronavirus pandemic has hit stocks hard, AMD is well-positioned to bounce back. All the people working from home and playing online video games is putting pressure on cloud computing data centers to add servers. That’s good news for AMD’s EPYC enterprise server chips.

Working (and Gaming) From Home Is Good News for AMD

Under the social distancing required because of COVID-19, companies have increasingly shifted employees to working from home, where possible. At the same time, people starved for entertainment — and millions of kids stuck at home because of school closings — have led to a dramatic increase in online gaming. And everyone is watching a lot more streaming video.

Microsoft (NASDAQ:MSFT) reported it has seen a 775% surge in in demand for its cloud services. Netflix (NASDAQ:NFLX) and other video streaming companies are cutting the quality of their streams because of the load they are putting on internet infrastructure.

This pressure on cloud computing data centers is good news for companies that make servers. Advanced Micro Devices has recently been making a push into the lucrative data center market having some real success. Its EPYC servers are taking on Intel (NASDAQ:INTC), with higher performance and lower energy costs. Last November, AMD stock saw a pop from news that China’s Tencent (OTCMKTS:TCEHY) was deploying EPYC servers for its cloud services.

Cloud infrastructure spending declined in 2019; however, the unprecedented demand as a result of the coronavirus pandemic is leaving cloud providers scrambling to add capacity. That’s an opportunity for AMD to move more of those EPYC servers.

Analyst Upgrades

With the data center market suddenly shifting back into buying mode, AMD saw resulting analysts upgrades last week. On Friday, Northland Capital Markets upgraded the stock to outperform from market perform, with a target price raised to $52.50 from $45.

Some Risk in New Console Launches

AMD may see more revenue than expected from the current generation of video game consoles. Advanced Micro Devices makes the custom processors used by Microsoft’s Xbox One and Sony’s (NYSE:SNE) PlayStation 4. Sales of the two consoles had dropped rapidly with the approaching launch of next-gen consoles. However, with the sudden rise in popularity of video gaming, sales seem to be on the rise. 

That being said, the coronavirus could push out the planned launch of the next generation PlayStation 5 and Xbox Series X. The two new game consoles — both built around AMD processors — were expected to launch this fall. However, there are two big concerns about that timing. The first is whether factories in China will be fully back online in time to get production of the new consoles humming. 

The second challenge will be if the coronavirus pandemic kicks off a major recession. If people have been laid off for an extended period of time, will they have the money to shell out an expected $500-$600 for a new console (plus games and accessories) at Christmas?

AMD is going to get a revenue boost when those new consoles launch and consumers snap them up, but it could be delayed.

Bottom Line for AMD Stock

Advanced Micro Devices has had a consensus hold rating among investment analysts for months. That’s still the case, despite recent upgrades like that of Northland Capital Markets. However, a median $50 price target offers some upside for long-term investors, and bears see it going even higher. 

Given the demand for EPYC servers, AMD’s recent offensive against Intel in the laptop CPU market, and a coming boost when Xbox Series X and PS5 production ramps up, Advanced Micro Devices seems well positioned for a return to growth.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.  As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/surge-cloud-computing-good-news-advanced-micro-devices-amd-stock/.

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