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4 Big Reasons to Stick With the Rally in AMD Stock

AMD stock will continue to defy valuation logic on the back of improving fundamentals

Semiconductor stocks have been on fire since late March on optimism that the Covid-19 impact on the global semiconductor market will be both short-lived and not-that-big. That optimism gained credence in late June, thanks to strong earnings reports and updates from Micron (NASDAQ:MU) and Xilinx (NASDAQ:XLNX). Semiconductor stocks continued on their blistering rally.

amd stock
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The world’s hottest and arguably strongest semiconductor company, Advanced Micro Devices (NASDAQ:AMD), has been no exception to this trend. From its March lows, AMD stock has risen more than 40%.

I think it’s worth sticking with this rally in AMD stock.

Despite some obvious valuation risks (50-times forward earnings, versus a semiconductor stock average of 19-times forward earnings), AMD stock will continue to rally over the next few months for four big reasons:

  • The fundamentals underlying the global semiconductor will dramatically improve in the back-half of 2020 and into 2021/22.
  • AMD’s business remains the fastest growing, most exciting business in the global semiconductor market.
  • Thanks to strong gaming tailwinds, AMD is positioned to have a blockbuster second-half 2020.
  • New products should sustain robust growth in the company’s ultra-important cloud business.

Improving Fundamentals

The fundamentals underlying the global semiconductor market will dramatically improve over the next few months thanks to super-charged demand in some of the industry’s critical end-markets.

Just look at all the demand catalysts on the horizon for the semiconductor market.

Enterprises everywhere are migrating to cloud-hosted productivity and connectivity solutions, creating super-charged demand for cloud infrastructure. Apple (NASDAQ:AAPL) is going to launch the 5G iPhone in the back-half of 2020. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are going to launch their next-generation gaming platforms. The global roll-out of 5G over the next few quarters should dramatically advance edge computing capabilities, which should allow for the emergence of an entirely new class of IoT devices and self-driving technology.

Net net, the fundamentals supporting the semiconductor market will only get better over the next few months, as technological breakthroughs and new products converge to spark super-charged end-market demand for CPUs and GPUs.

The Best Game in Town

When it comes to the semiconductor market, AMD has been, still is and will remain the best game in town.

Just look at the company’s growth rates.

In the first quarter of 2020, AMD reported 40% year-over-year revenue growth. Global semiconductor sales in the same time period rose just 7%. Meanwhile, second quarter sales are expected to rise more than 20%, while full-year 2020 sales are expected to rise 25% — and that’s in the midst of a global pandemic, which entirely shut down semiconductor supply chains early on in the year.

In other words, AMD remains on this robust growth trajectory which is unmatched across the global semiconductor market.

So long as this remains true — and it should for the foreseeable future (more on that later) — then Wall Street will continue to perceive AMD stock as one of, if not the, highest quality stock to buy to play the semiconductor boom.

And, so long as that remains true, when the semiconductor market moves higher, AMD stock will be leading the rally.

Strong Gaming Tailwinds

AMD is positioned to report blockbuster results in the second-half of 2020 thanks to its favorable exposure to gaming market tailwinds.

For the first time since 2013, Microsoft and Sony are unveiling new generation gaming consoles this holiday season. Both of those consoles are built on AMD’s Zen 2-powered CPUs.

Demand for these platforms, which represent huge leaps from the current generation of consoles, will be significant. As such, AMD will make and sell a lot of Zen 2-powered CPUs in the third and fourth quarters 2020.

At the same time, AMD is planning on launching its new GPU, the highly hyped “Big Navi“, in the back-half of 2020. There is a huge opportunity for that new GPU to have tremendous success, because nearly 60% of AMD gamers use legacy GPUs, and the reasons for those majority of gamers to upgrade GPUs will be stronger than ever with the Big Navi product launch and gaming activity and spending at all time high levels.

Big picture: AMD’s big gaming business is set for a huge second-half.

Sustained Cloud Momentum

Arguably the most important driver of AMD stock’s huge gains over the past few years has been the company’s ability to penetrate the ultra-valuable, ultra-important cloud data-center market.

A few years ago, AMD had zero presence in this market. But, thanks to its Epyc processors and Radeon Instinct GPU accelerators, AMD’s data-center business has grown by leaps and bounds in 2018 and 2019. That big growth continued in the first quarter of 2020, and is projected to persist throughout the balance of the year.

Net net, exiting 2020, AMD looks positioned to have 10%+ share of the global data-center CPU market.

That’s a big deal, since the data-center market is a big ($40+ billion within the next few years), and every percentage point AMD gains in market share equates to hundreds of millions of dollars in additional revenue.

So long as AMD can sustain robust momentum in this market, the company’s growth narrative will remain equally robust. That robust growth narrative will continue to provide support for AMD stock.

Bottom Line on AMD Stock

The big argument against AMD stock is valuation. I get that argument. I really do. AMD stock trades at 50-times forward earnings. Your typical semiconductor stock trades at 19-times forward earnings.

But this premium valuation in AMD stock is warranted by the company’s superior growth fundamentals. Those fundamentals are only going to get better over the next several months. As they do, AMD stock will continue to defy valuation logic, and power higher.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long MSFT. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/4-big-reasons-to-stick-with-the-rally-in-amd-stock/.

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