Advanced Micro Devices (NASDAQ:AMD) surged this week after Intel (NASDAQ:INTC) announced further delays in its 7nm chipset. AMD stock holders have seen their investments rise 73% since the start of the year, adding to their massive 2,900% gain since 2015. Many have started to wonder if it’s time to take profits.
But don’t throw in the towel just yet; there’s more good news to come. Why? It all comes down to technology.
The company’s sudden dominance in high-performance 7nm chipsets gives the firm the power it needs to out-compete rivals Intel and Nvidia (NASDAQ:NVDA) for the next several years. Those who have invested in AMD stock must now resist the urge to take profits too soon.
AMD Stock to Outperform In 2021
Advanced Micro Devices has quickly become a key player in the 7nm chipset market, the cutting-edge in chipset miniaturization. The process, developed with Taiwan-based TSMC (NYSE:TSM), allows chip designers to squeeze more transistors into a smaller space.
And that means faster speeds and substantial power savings.
Intel, meanwhile, will be stuck using older 10nm technology until 2022-2023 from poorly-timed production delays.
These unrelated events have helped AMD leapfrog the competition. Sales in 2Q20 jumped 26%, with profits rising to 13 cents per share. In the earnings call, CEO Lisa Su said she now expects the company to grow 32% this year, up from 25% guidance in April. Shares shot up 10% on the news.
And their lead is set to grow. In March, Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) announced that both PlayStation 5 and Xbox Series X would run on custom-designed 7nm AMD chipsets. And by 2021, the firm plans to introduce the even more advanced 5nm chipsets in its next-gen Zen 4 chips. Intel, on the other hand, isn’t even scheduled to release a 7nm chip until 2022.
The Story of AMD Stock’s Success
AMD wasn’t always a technological leader. In 2015, the company found itself with just 10.7% of the graphics processing unit (GPU) market, down from 25% in 2011. Their flagship graphics card, the Radeon RX300, performed even worse than 6-year-old Nvidia chips. By the time 2016 came around, AMD didn’t even bother creating a rival to compete with Nvidia’s new GTX 1080 gaming GPU.
Why was AMD at such a low point?
To understand, we need to look back to the 2008 financial crisis, when AMD sold its foundry business to United Arab Emirate’s sovereign wealth fund (SWF). At the time, the sale seemed like a brilliant move. The struggling company received a much-needed $1.4 billion cash injection, with another $3.6 billion due over the following five years. Also, management reasoned that the firm could refocus its R&D expenses on designing chips and leave the capital-intensive manufacturing process to someone else.
With that belief, management signed an exclusive agreement with the newly founded spinoff, GlobalFoundries. Shares rocketed from $2 to $10 within a year.
But short-term gain didn’t translate into long-term success. In other words, that same agreement ended up proving disastrous. While rivals Intel and Nvidia were free to develop ever-miniaturizing chipset technologies, AMD was stuck with a manufacturer that dragged its feet. With each successive chip generation, the firm fell further and further behind.
Things reach an all-time low in October 2018, when GlobalFoundries announced it wouldn’t even manufacture the upcoming 7nm chipset technologies.
2019: AMD Turnaround
Then came a watershed moment. In 2019, the two firms came to a settlement that essentially voided the foundry’s exclusive contract. For 7nm chips and better, AMD could now work with anyone.
And one thing became quickly apparent: AMD had regained its magic touch. Today, their high-end Radeon VII graphics card now competes directly with Nvidia’s flagship RTX 2080. Despite a $100 lower price tag, Radeon VII even outperforms at 4K resolutions.
The situation with Intel shows a similar set of gains in CPUs. “AMD’s 7nm [CPU] chips either consume less power or provide much better power-to-performance efficiency,” writes Paul Alcorn at Tom’s Hardware, a top reviewer of PC components. “As a result, you’ll get more work done per watt of energy consumed, which is a win-win.”
Apple in 1998? Try AMD in 2021.
Smart investors who know AMD’s history will quickly realize there’s more growth ahead. Today, the company controls just 20% of the PC market. Susquehanna Financial analyst Christopher Rolland now estimates that the chipmaker’s share could rise to 35% of notebooks and 40% of desktops by 2023. As AMD introduces its even faster 5nm chipset in 2021, its lead over Intel will grow. On Wednesday, Merrill Lynch analyst Vivek Arya reiterated his $100 price target, suggesting a 18% upside.
There are still some risks to this investment. At 52 times 2021 earnings, the stock isn’t cheap. And the company’s reliance on TSMC’s manufacturing may create negotiation issues down the road.
Despite these issues, AMD remains well-positioned for 2021. Its market capitalization of $100.1 billion is still less than half of Intel’s $207 billion. Those lucky enough to have bought AMD stock in 2019 should hold on for just a little longer.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. As of this writing, Thomas Yeung did not hold a position in any of the aforementioned securities.