Advanced Micro Devices (NASDAQ:AMD) is a late bloomer. Keep in mind that the company was founded in 1969. Yet it has not been until the past few years that it has really started to shine. And in that time, AMD stock has been one of the hottest names in the tech world. During the past five years, the shares have gone from $2 to $87. The company’s market capitalization is now about $102 billion.
Now AMD is certainly facing many risks. First of all, the company depends significantly on chips manufactured by Taiwan Semiconductor (NYSE:TSM). The fact is that it can be tough to maintain the quality of products made by an outsourcing partner, especially when it comes to developing complex chips.
Next, the competition is intense. AMD must compete with powerful rivals like Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC).
But perhaps the biggest issue is the shares’ lofty valuation, as AMD stock is trading at 45 times analysts’ average 2020 earnings estimate.
Can the shares climb further? I actually think their rally is not over, as there are some good reasons that their momentum will continue. It looks like the company’s revenue growth will remain robust, while its profits will continue to rise. Let’s take a look:
AMD’s Leadership
AMD CEO Dr. Lisa Su does not get enough attention. But she should. Su is one of the best CEOs in the world. She took the helm of AMD in 2014, which was a perilous time for the company, as it was essentially on the verge of bankruptcy.
Su took bold actions, aggressively cutting costs, forming collaborations in China to bolster AMD’s balance sheet, and making smart decisions about the development of its product road map.
It’s important to consider that, before joining AMD, Su had a sterling resume. She had served as an executive at multiple tech giants, including Texas Instruments (NYSE:TXN), International Business Machines (NYSE:IBM), and NXP Semiconductor (NASDAQ:NXPI). In terms of education, she received a Ph.D. from MIT and has published over 40 technical papers. According to Su, “AMD is at our best when we are taking bold, calculated risks and aggressively pursuing the leading-edge technologies that change the world.”
Innovation
Part of the reason AMD stock has done well is the mishaps of Intel, which has faced major challenges when it comes to developing next-generation chips.
And AMD has done a pretty good of capitalizing on Intel’s issues. It definitely helps that AMD has been obsessed with innovation. For example, AMD launched its 7nm chips last year, which has significantly boosted its growth. And the company’s low-cost strategy has enabled it to maximize demand for its products.
Further, AMD was able to beat Nvidia to market with a 7nm GPU chip.
AMD will likely continue to innovate for some time. After all, AMD has recently launched its Zen 3 architecture for its CPUs, whose performance has greatly improved.
The Market Opportunity
AMD has several major growth catalysts. Covid-19 has resulted in a surge of purchases of laptops and desktops for remote working. The demand for servers has also climbed as cloud computing continues to proliferate.
Next, the rollout of 5G should be another growth driver for AMD. There will likely be a need for more advanced chips for smartphones and IoT (Internet-of-Things) devices.
Meanwhile, AMD will benefit from the launch of gaming consoles in the fourth quarter by Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNY).
To get a sense of AMD’s total addressable market (TAM), consider that its data-center TAM is $35 billion, its PC TAM is $32 billion for PCs, and its gaming TAM is $12 billion. That works out to a total TAM of $75 billion. In other words, this company still has a great deal of room to run.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.
