Advanced Micro Devices (NASDAQ:AMD) is once again acting as one of the stars in the semiconductor group as AMD stock is higher by 16% year-to-date, or about double the returns offered by the widely followed PHLX Semiconductor Index.
Often joined at the hip with high-flying rival Nvidia (NASDAQ:NVDA), AMD benefits from many of the same catalysts that are propelling Nvidia higher this year, including data centers. Prior to the novel coronavirus pandemic, data center demand was already booming, acting as a pivotal catalyst for AMD and Nvidia, due to, among other factors, increasing cloud computing demand.
Covid-19 is bolstering the case for investments with data center exposure.
“Data centers are a vital cog in today’s digital world, vast warehouses that contain servers that host and distribute the cloud-based applications we rely on to work, learn and socialize. Whenever we click on a photo stored on the cloud, we are accessing a data center based who knows where,” said Morningstar in a recent note.
Fortunately for investors that missed out on some or all of AMD’s run earlier this year, there’s more upside to be had with data centers acting as a prime contributor of the chipmaker’s potential upside.
Cloud Growth Is Rapid
When investors think of cloud computing, they often think of the dedicated players or technology titans, such as Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). However, the likes of AMD and Nvidia are intimately linked to the cloud computing boom and what a boom it is and expected to be in the years ahead.
The recession caused by Covid-19 won’t stand in the way of that growth, reports S&P Global Market Intelligence.
“The cloud market grew rapidly following the financial collapse of 2008, industry analysts note, and all signs point to a similar acceleration as the pandemic forces even more dependence on technology to support a homebound global workforce. Since that growth can only happen by adding or changing the equipment in the data centers that support cloud services, companies that sell chips, data-storage units, networking equipment, and other data-center-class hardware are benefiting from the movement.”
In the first quarter, AMD’s revenue jumped 40% year-over-year due in large part to cloud and server growth. While those type of gains aren’t sustainable over the long run, the semiconductor company can continue increasing revenue at rates meriting of growth stock status due to the seismic shifts at which cloud computing is at the epicenter.
For example, Covid-19 prompted dramatic alterations in the way people work. While not everyone will be working from home on a permanent basis, many will and that trend underscores the need for enhanced cloud and cybersecurity offerings, providing a long-term tailwind for data centers in the process. That’s a viable catalyst for AMD.
Bottom Line on AMD Stock
Integral to the AMD thesis is that the stock isn’t solely dependent on cloud and data centers. For example, the looming video game hardware upgrade cycle that’s coming later this year is widely viewed as possible for AMD and Nvidia.
In the case of AMD, its AMD Zen 2 CPU and a custom AMD RDNA 2-based GPU will be components in the new PlayStation 5.
Then there’s the intersection of the cloud and gaming, aka cloud gaming. Cloud gaming is still in its formative stages and among the relevant chipmakers, Nvidia forged into the arena faster than AMD, but this is forecast to be the next frontier of growth for gaming and there will be opportunities for AMD to gain a foothold, diversifying its gaming footprint along the way.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
