Advanced Micro Devices (NASDAQ:AMD) stock surged to all-time highs in late July after the hyper-growth semiconductor company reported excellent second quarter earnings. The company smashed expectations, and included strong guidance for the third quarter and the rest of the year.
Zooming out, though, the earnings report broadly confirmed that AMD is absolutely crushing it in the semiconductor space right now.
The company continues to lean into superior product innovation to rapidly gain global CPU and GPU market share at a time when CPU and GPU end-market demand is surging. In turn, they’re powering huge revenue growth, significant margin expansion and jaw-dropping profit growth.
And so long as this trend continues, AMD stock will keep powering higher.
Overall, from where I sit, I think this trend will continue for — at least — the next few years… and maybe even longer.
Thus, I see AMD stock only going higher from here. Sure, valuation friction will slow the pace of gains going forward. And don’t expect a repeat of what AMD stock has done over the past three years (up 461%) in the next three years.
However, there’s enough fundamental firepower here to keep the stock in rally mode. Therefore, you should stick with the rally — and here’s why.
AMD’s Blowout Earnings Report
From head to toe, AMD’s second quarter earnings report was near-perfect.
Revenues topped expectations, rising 26% year-over-year. Gross margins also expanded three points year-over-year. The huge revenue growth drove 140 basis points of positive operating leverage, and operating profits more than doubled year-over-year — powering a huge beat on the bottom-line.
All great stuff,and it’s all expected to continue for the foreseeable future.
Moreover, management is guiding for third quarter revenues to rise 42% year-over-year (the Street was sitting at 31% growth), and for gross margins to expand one point year-over-year to 44%. Concurrently, management lifted its full-year outlook from about 25% revenue growth, to 32% revenue growth. And this is also while maintaining that gross margins will rise two points YOY to 45%.
The implication, of course, is that AMD continues to lean to into its portfolio of next-gen products — like Ryzen and EPYC — to meaningfully gain market share in the global CPU and GPU markets. This is at a time when CPU and GPU end-market demand is soaring on the back of work-from-home trends, 5G, cloud computing, AI, AR/VR, etc.
So, as long as this continues, the rally in AMD stock should persist.
Strong Underlying Growth Trends
For the foreseeable future, AMD will continue to grow market share in the burgeoning global CPU and GPU markets.
Intel (NASDAQ:INTC) — AMD’s biggest competitor and the “Goliath” of the CPU world — just announced that its next-gen 7-nanometer chips have been delayed and won’t launch until late 2022 at the earliest.
That said, AMD has another two-plus years to lean into its superior product line-up to drive share expansion. That’s a big deal.
Additionally, the global semiconductor market is huge. Like, $400-plus billion in annual sales huge. And it’s growing fairly quickly, thanks to society’s accelerating pivot towards all things technology (and therefore, all things powered by semiconductors).
With that in mind, AMD is a small player in that market. Given management’s projected 2020 revenues, AMD will end the year with just 2.1% market share. But that’s up from 1% market share back in 2015, and 1.6% market share in 2019. This means that AMD isn’t just gaining share in this huge market, but the company is accelerating its share expansion in the global semi industry.
It doesn’t take a rocket scientist to connect the dots.
Thus, if AMD keeps gaining share from a small base in the huge global semiconductor market, then AMD will sustain a robust growth profile that is characterized by double-digit revenue growth and steady margin expansion.
Continued Strength for AMD Stock
Of course, the AMD stock price reflects optimism with respect to the company’s ability to sustain share expansion. After all, shares trade at 12-times trailing sales.
Therefore, the question now is: how much market share can AMD gain?
For perspective, Intel controlled about 17.5% of the market last year, and AMD is projected to gain about 50 basis points of global semiconductor market share this year.
If you assume that AMD sustains a cadence of 50 basis points of market share expansion for the next 10 years, then by the end of the decade, the company will be looking at 7%-plus market share. And by my numbers, that will lead to $40 billion-plus in revenues and $10 in earnings per share.
However, it will be tough for AMD to sustain that cadence of share expansion once Intel comes to market with its own 7-nanometer chips and as AMD gets bigger. Therefore, it’s more likely that AMD’s market share expansion cadence drops from 50 basis points per year, to around 30 basis point per year post-2022. Assuming so, I think it’s more likely that AMD ends the decade with 5%-plus market share, $30 billion-plus in revenues and $7.50 in earnings per share.
And, using a semiconductor sector-average 19-times forward earnings multiple and an 8.5% annual discount rate, those estimates imply a 2020 price target for AMD stock anywhere between $70 and $90.
Therefore, as long as AMD stock trades within that range in 2020 — and the company continues to fire on all cylinders — I say stick with the rally.
Bottom Line on AMD Stock
Collectively, AMD’s earnings report was perfect.
Sure, you could argue AMD stock is already priced for perfect today. But it’s not priced for perfect to keep happening for several years. And that may actually happen, given AMD’s robust momentum and continued delays from Intel.
Thus, if AMD keeps firing on all cylinders, I think the stock can march towards $90.
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 rated one of the world’s top stock pickers 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 did own a position in any of the aforementioned securities.