The Easy Gains Are Over for Advanced Micro Devices

Advanced Micro Devices (NASDAQ:AMD) is one of the most impressive comeback stories of the past five years or so. Its tantamount to a David-and-Goliath match-up, with the company having to face off against mega-rivals like Intel (NASDAQ:INTC). But CEO Lisu Su was masterful in her strategy — and the result has been huge gains for shareholders in AMD stock.

Image of the Advanced Micro Devices (AMD) logo outside of a corporate building
Source: Sundry Photography /

When it comes to this year, though, things have gotten a bit shaky. For instance, consider the fact that AMD has gone from $95 in late January to around $87 now.

Of course, it’s true that the return for the past 12 months has been roughly 83%. But there has also been increased volatility in the markets. That means a pullback is inevitable and healthy.

However, for AMD stock, what about the rest of the year? Does it make sense to buy this name on the dip? Let’s take a look.

AMD Stock in the Fourth Quarter

The fourth quarter results for AMD — which were reported last week — were standout. Quarterly revenues shot up by 53% to $3.24 billion and full-year revenues jumped 45% to $9.76 billion. Net income also doubled. All in all, the company beat the Street on both the top and bottom lines.

AMD was also able to continue to produce strong cash flows. In Q4, operating cash flow came to $554 million. Now the company currently has about $2.29 billion in the bank.

And going forward, it expects the growth to remain strong, albeit at a slower pace. For this year, its revenues are forecast to grow at 37%.

But despite all that, Wall Street really wanted more. This helps explain the pressure we’ve seen on AMD stock after its earnings announcement.

To dive into more specifics, though, the company had a busy quarter with some nice wins. Take a look at the following highlights:

  • At this year’s CES conference, AMD announced the AMD Ryzen Pro 5000 Series Mobile processors for enterprise, the Radeon RX 6000 Series of GPUs (graphics processing units) for “next-generation PC gaming” and more well-received hardware
  • AMD announced a joint partnership with IBM (NYSE:IBM) for developing systems for “hybrid cloud environments”
  • AMD increased its cloud capabilities for Amazon’s (NASDAQ:AMZN) AWS platform.
  • HP (NYSE:HPE), CSC Finland and EuroHPC teamed up with AMD to use its CPUs and accelerators for supercomputer systems.

While growth was robust across all the main businesses for AMD, the area that saw the most traction was its enterprise business. Revenues were up a sizzling 176% YOY to $1.28 billion. This division involves the company’s main server chips, CPUs and GPUs.

With the console business heating up because of new launches from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), there has also been a surge in demand for semi-custom offerings. The growth has actually been higher than the prior upgrade cycle.

Finally, robust growth has kept up in the company’s cloud business, too, with success in securing adoption by biggies like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and more.

What to Think of AMD

However, while the business is certainly healthy, there are risk factors for AMD stock. The company is in the process of pulling off a $35 billion acquisition of Xilinx (NASDAQ:XLNX). Making that deal will be no easy feat, in terms of both the integration and dealing with the different company cultures.

Next, the competitive landscape is also getting more intense. Nvidia (NASDAQ:NVDA) continues to take market share from AMD in data centers and is benefitting from the artificial intelligence (AI) megatrend. And even Intel has been getting things back on track, hiring a new CEO who should get results.

Worst of all, though, AMD stock is still far from cheap. Its current forward price-earnings ratio is 45.8. In other words, there is little room for error in the company’s performance for the next few quarters.

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 the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL

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