Advanced Micro Devices (NASDAQ:AMD) keeps moving higher as analysts offer up higher price target recommendations. This is despite the high valuation that AMD stock sports, which I have written about before. As long as they love AMD, I think you can see the stock continue to move up.
Since my last article on Oct. 15, where I pointed out that AMD stock was at 55x forward earnings, it has risen over 9% to nearly $92. I showed how AMD could use its high-priced stock profitably to buy a rival.
I analyzed how this would actually lower the overall price-earnings (P/E) ratio for AMD on a combined basis. The P/E ratio would fall from 55x to about 44x. This was based on a $30 billion takeover price.
Two weeks later, The Wall Street Journal reported AMD had reached an agreed deal to buy a rival chipmaker, Xilinx (NASDAQ:XLNX), using AMD stock. The deal was going to be valued at $35 billion, so the net effective reduction in P/E ratios would be lower.
But it still shows how powerful this tool is – using your highly valued shares to buy a rival that has a lower P/E ratio.
The AMD – Xilinx Hookup
The Financial Times recently wrote that this deal shows that Advanced Micro Devices (AMD) is one of the long-term winners as a chip supplier for data centers. The article points out that data centers are essentially what is known as “the cloud” for us laypeople.
AMD is at the forefront of where the action is in terms of who really needs and buys large amounts of semiconductor chips. For example, rival Nvidia (NASDAQ:NVDA) recently bought Arm Limited, the U.K. semiconductor unit of Softbank (OTCMKTS:SFTBY).
I wrote about that deal at the end of September and how Nvidia lowered its P/E ratio just like AMD has. It paid a mixture of cash and stock valued at $40 billion to buy this chip unit. Both companies are looking to increase their market gains in the lucrative data center market for advanced CPU chips.
The Financial Times article explains that the chips that AMD and Xilinx make, known as FPGAs, help neural networks by acting as accelerators for “deep learning.” Neural networks are necessary for artificial intelligence (AI) applications in various industries.
Also known as machine learning, many large companies are already employing this technology. This article by Wordstream shows how 10 companies are using machine learning by manipulating large data sets. For example, Yelp (NYSE:YELP) uses machine learning to manage images, Pinterest (NYSE:PINS) uses it for content discovery, and Facebook (NASDAQ:FB) uses AI to screen out spam, etc.
Therefore, as a result of this avant garde acquisition, analysts are now singing the praises of AMD stock.
What Analysts Say About AMD Stock
On Dec. 18, Barron’s reported that a Wells Fargo analyst, Aaron Rakers, recommended four semiconductor companies, one of which was AMD stock. Barron’s suggested that these stocks could rise further in 2021 based on the report by Wells Fargo.
For example, Rakers argues that AMD’s data center processors will meet the need for more chips that can process the large amounts of data they use. Moreover, he reports that AMD’s central processing units (CPUs) are more popular than CPUs from Intel (NASDAQ:INTC). As a result, AMD is gaining market share from Intel.
In addition, he argues that this trend will continue. AMD is ramping up production of its Zen-3 Epyc Milan CPUs.
According to TipRanks, Rakers lifted his price target on AMD stock to $120 from $100. This implies a potential 25% gain in the stock if it hits that price target.
By the way, Wells Fargo has the highest rating and price target among a group of 20 analysts that TipRanks follows on AMD stock. For example, as a group, their average target price is only $94.18. So, Rakers is one of the few who has consistently beaten the group and so investors might want to pay attention to his predictions.
What To Do With AMD Stock
I suspect that more analysts will begin raising their price targets on AMD stock as they assimilate the benefits of the Xilinx deal.
I want to learn more about the financial structure of the deal, but my first pass is that AMD must be doing something right here. Even though much of the benefits are clearly already seen in the AMD stock price, at least the company is using shares. This will have the effect of lowering the overall P/E ratio for the combination.
Therefore, follow the lead of the Wells Fargo analyst, Rakers, who seems to know what’s up with AMD stock.
In the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
