Although the seasonal strength for Advanced Micro Devices (NASDAQ:AMD) is coming to an end, the computer chip giant has strong prospects ahead. The company posted strong fourth-quarter results and continued to par debt levels. Strong chip demand across the board should give AMD stock a lift in 2021.

Source: Akura Yochi / Shutterstock.com

AMD’s solid sales performance reaffirmed the bull run in the last few years. In the fourth quarter, its free cash flow growth and debt reduction are notable accomplishments. AMD posted FCF of $480 million, up from $400 million last year (per slide 30). It lowered its debt by a wider margin, from $486 million in Q4 of 2019 to $330 million in the last quarter. At this pace, the company could be debt-free in three quarters.

AMD does not need to hurry in paying its debt. Interest rates are low and show no signs of rising. Still, it has 7.5% senior notes due in 2022 worth $312 million. In its growth phase, it is better off spending on marketing and sales efforts to promote its suite products.

Growth Across All Divisions

AMD posted revenue growing by 37% to $1.96 billion from its computing and graphics unit. Strong demand for its Ryzen processor family lifted desktop CPU sales. Its chip refresh, which features Zen 3 in the Ryzen 5000 processors, achieved strong sell-through.

CEO Lisa Su said that the sell-through is more than double the launch quarter sales of any previous generation of Ryzen chips. This implies that not only will chip sales accelerate in 2021 but future refreshes will speed up the pace of sales.

In January, AMD launched Ryzen 5000 mobile processors at Computer Electronic Show 2021. The chip will power a wide range of laptops. This includes commercial, gaming, and ultrathin models. By introducing useful features, such as a 23% higher performance than past models and 17.5 hours of battery life, expect unit sales to grow.

EPYC the Breadwinner for AMD Stock

AMD’s Enterprise, Embedded, and Semi-Custom segment revenue almost doubled, up 176% year over year to $1.28 billion. Upgrades from the cloud and enterprise markets lifted demand for AMD’s EPYC server processor. The strong demand more than offset the ongoing underperformance in the company’s graphics division.

Radeon graphic card sales will probably continue to lag that of Nvidia (NASDAQ:NVDA). Nvidia has better marketing for its latest GPU. It also invests heavily in software device driver development, so customers rarely have any glitches. Conversely, AMD cannot slip up on software quality for its GPUs.

For now, AMD may lean on the improving visibility for its third-generation EPYC chip. It may leverage its deep customer relationships. Thanks to solid customer confidence, a shorter product testing time is speeding up server chip sales.

Fair Value

16 out of 23 analysts have a “buy” rating on AMD stock. The average price target is $107.52, according to Tipranks. Readers may forecast a conservative annual revenue growth rate. In a 5-year discounted cash flow EBITDA exit model, the following input projection would imply a fair value of $95 for AMD stock:

Model courtesy of finbox

Rising average sales prices will help AMD’s profit margins in the server business. Intel (NASDAQ:INTC) is struggling to keep up with AMD for now. If that changes and Intel wakes up, AMD need not worry. It is not competing only on price. Instead, it is competing on the overall value of the product offering. Corporations seek the lowest total cost of ownership without sacrificing on performance. They will keep picking AMD’s chips over that of Intel.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.