Despite a mixed first quarterly earnings report, Advanced Micro Devices (NASDAQ:AMD) climbed steadily. The Nasdaq’s positive return for 2020 helped sustain the high valuations in AMD stock. As the company continues its journey in disrupting the computing market and developing high-end computing solutions, why did the stock get stuck in a range in May?
Investors should look again at AMD’s first quarter achievements and its outlook for the year. Recent product developments set a path for accelerated growth, too.
First Quarter Results
AMD has a broad product portfolio. Its Ryzen “Zen 2” chips have up to 16 cores. AMD Ryzen for mobile computers support ultrathin and gaming notebooks. In the high-end desktop, Ryzen Threadripper has up to 64 “Zen 2” cores. And in the server market, AMD EPYC offers the best growth prospects. AMD said that the 64 “Zen 2” cores offer up to a 50% lower total cost of ownership in the server space (per slide 5).
AMD’s revenue rose a 40% year-over-year to $1.79 billion. Its graphics and computing division drove this growth. Improving cash flow, cash and cash equivalents of $1.4 billion, and gross margin of 46% all point to a healthy business. Plus, the gross margin expansion positions AMD to earn higher profits in the quarters ahead. Still, the GAAP 13 cent earnings per share values the stock at a price-to-earnings ratio of over 100 times.
Given AMD shares are holding the $50 – $57 trading range, the market is not showing much concern on its valuations.
AMD Stock: Outlook for 2020
AMD forecast revenue growing a respectable 25%. Gross margin will inch higher to 45%, up from 44% in the current second quarter. For the near-term, the company is prioritizing on delivering high-performance parts over profits. CEO Lisa Su said that “we prioritize server and desktop first from a performance capability standpoint.”
After Lenovo, HP Inc. (NYSE:HPQ), and Dell Technologies (NYSE:DELL) all reported strong desktop and notebook demand, AMD unit sales should grow at a faster pace this year. Su said that “we’ve seen that shift that notebook is actually quite a bit stronger than the desktop business, just given people want the flexibility.”
A benchmark on AMD Ryzen 4000, its notebook Accelerated Processing Unit (APU), showed a whopping 90% performance boost over the previous Ryzen 3000. Gamers and price-conscious consumers would benefit from buying a notebook powered by the Ryzen 4000.
Risks to AMD Stock
Intel’s (NASDAQ:INTC) hiring of another AMD graphics processing unit (GPU) executive, Ali Ibrahim, is a negative development for AMD. Ibrahim worked on cloud and Xbox-related projects for 13 years. He will take on a VP title at Intel’s discrete GPU department.
Intel lacks a discrete GPU product. Its integrated GPU will keep its office PC chip solutions at lower prices. But Intel knows that gaming is on the rise and the demand for more GPU computing power will only increase. AMD already faces fierce pressure from Nvidia (NASDAQ:NVDA). In its first quarter, Nvidia reported non-GAAP EPS of $1.80. Revenue rose by 38.7% to $3.08 billion.
Nvidia’s launch of Minecraft with RTX on more than 100 new laptop models, the release of a new GeForce RTX SUPER GPU, and its dominance in the data center space, will pressure AMD. AMD’s EPYC is winning many customers, but it does not have a server-based GPU solution in the offering.
Analysts have an average price target of $56.43 (per Tipranks). This implies very little upside in holding AMD. The astute investor may forecast revenue growing by at least 10% annually in a 5-year discounted cash flow revenue exit model. With the following metrics below, AMD has a fair value of ~$60.
|Discount Rate||10.5% – 9.5%||10.0%|
|Terminal EBITDA Multiple||23.1x – 25.1x||24.1x|
|Fair Value||$55.69 – $62.27||$58.92|
|Upside||3.5% – 15.7%||9.5%|
Data courtesy of finbox
Investors already holding AMD should continue to do so. The company is more likely to please investors than to disappoint them, given the strong chip demand ahead.
As of this writing, the author did not hold a position in any of the aforementioned securities. Chris runs the DIY Value Investing Marketplace guide.