I drew the Advanced Micro Devices (NASDAQ:AMD) card today. It’s been a little over a month since I last covered one of the hottest semiconductor stocks in America. According to Finviz.com, over the past 52 weeks, AMD stock is up 95.5%, putting it fourth out of 63 semiconductor companies.
However, in 2020, Nvidia (NASDAQ:NVDA) is kicking its butt. Year-to-date through May 8, NVDA stock has a total return of nearly 33%, more than double AMD’s total return of 16%. With Nvidia in 6th place over the past 52 weeks and charging hard, it begs the question of whether Advanced Micro Devices’ stock has hit a wall.
AMD Stock Is Ready to Move Higher
The company reported first-quarter results April 28 and they were generally good with revenues up 40% year-over-year while operating income increased a whopping 366% over Q1 2019.
“We executed well in the first quarter, navigating the challenging environment to deliver 40 percent year-over-year revenue growth and significant gross margin expansion driven by our Ryzen and EPYC processors,” AMD CEO Dr. Lisa Su said in its press release.
However, it is the fact that Su was confident enough about the company’s future business prospects to provide investors with 2020 guidance that speaks volumes about where its stock is headed in the next six to 12 months.
Su projected that AMD would grow its Q2 2020 revenues by 21% YOY and 4% on a sequential basis. For the entire 2020, it expects sales growth of 25%, plus or minus five percentage points.
In terms of gross margins, it expects them to be 44% in the second quarter and 45% for the entire year. In the first quarter, they came in at 46%, 100 basis points higher than in the fourth quarter and 500 higher than a year ago.
Considering many aren’t attempting to forecast their business for the foreseeable future, if you own AMD stock, you ought to be reassured that the company is going to make it through the remainder of the year relatively unscathed.
If this is the case, AMD stock becomes somewhat of a defensive play as we head into the second half of the year, which suggests the 15% gain in April might be the beginning of its next leg up.
It’s Come Too Far Too Fast
Since Dr. Su became CEO in October 2014, Advanced Micro Devices’ stock has gained 1,522%, easily outperforming its competitors and the markets in general. Given semiconductor stocks tend to be cyclical in nature, should the economy remain in recession for an extended period, there is no question the company would revise its sales outlook for the year.
In the first quarter, the biggest negative of the company’s quarterly report was the 21% drop in the sale of enterprise embedded and semi-custom chips to $348 million; analysts expected a 4% increase. Su blamed the decline on lower gaming console sales. It was the second consecutive decline for this segment of the business.
With so many people playing video games right now, if it reports a decline in the second quarter, which is at the end of June, investors can expect its share price to fall on the news.
“As expected, semi-custom product revenue was negligible in the quarter, as Sony and Microsoft both reduced inventory in advance of next-generation console launches,” Su stated in its Q1 2020 conference call.
“We expect semi-custom revenue to increase in the second quarter and be heavily weighted toward the second half of the year as we ramp production to support the holiday launches of the new PlayStation 5 and Xbox Series X consoles.”
Su is betting on the console launches in time for the holiday shopping season. Others aren’t nearly as confident. Forbes contributor Erik Kain, who writes about video games for the publication, discussed his thoughts on a possible launch date in late March. While much has changed with regards to a probable reopening of businesses, I agree with his assessment that holiday 2020 is too optimistic.
“So when will these new systems release? It’s impossible to say, of course, but I’m betting on a full-year delay. Holiday 2021. I hope I’m wrong. Truly. I hope I’m wrong about all of this,” Kain stated in March.
With over half the 40 analysts covered AMD stock rating it as a hold or a sell with an average 12-month target price of $52.86, it’s got to deliver perfection in the second quarter and beyond for its stock to keep moving higher.
It’s had a good run. It could be time for Nvidia to take the lead. Long term, though, as long as Su remains in charge, AMD is a winner.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.