Advanced Micro Devices (NASDAQ:AMD) didn’t do what I thought it was going to do. At least, AMD stock didn’t.
Heading into last week’s fourth quarter earnings release, I thought the quarter would be strong. And I thought that strength would be a catalyst for AMD stock, which had seen sideways trading heading into the report.
The report was as strong as I predicted. The performance of the stock, however, was not. AMD actually declined 6.2% the following day, and nearly 10% over three sessions.
It’s difficult to see why that is. It’s possible volatility elsewhere contributed: it appears that hedge funds have reduced their positions in response, and AMD long has been a popular hedge fund pick. As I argued last week, news elsewhere suggested the quarter would be strong. It’s even possible that investors have become somewhat accustomed to blowout quarters from this rising chip giant.
Whatever the cause, it’s a buying opportunity. In the short term, I might have been wrong in terms of how AMD stock would move. In the long term, I’m even more bullish.
A Blowout Report
Simply put, it’s difficult to find anything to criticize in AMD’s fourth quarter report, or in its full-year numbers.
For Q4, revenue rose a sparkling 53% year-over-year. That’s the best performance (so far) among large-cap chip manufacturers. Margins expanded: though gross margins were flat, operating income growth of 64% outpaced the rise in revenue. So did a 63% increase in adjusted earnings per share.
The quarter closes a truly impressive year. 45% revenue growth, gross margin up two points to 45%, adjusted EPS that more than doubled.
Now, investors can quibble a bit with 2020 performance. AMD probably saw some benefit from the novel coronavirus pandemic, which drove demand across multiple end markets. Gaming, data center, and even personal computers all benefited to at least some extent from “work from home” and/or “stay at home” trends.
But AMD’s outlook certainly doesn’t suggest that 2021 revenue was pulled forward into 2020, or that the company’s impressive multi-year performance is set to end.
The company guided for roughly 37% top-line growth in 2021 — off a 2020 base just shy of $10 billion. Adjusted gross margin has seen a staggering improvement from 28% in 2015 to a guided 47% or so in 2021. The 2021 figure is expected to rise another two points year-over-year — a bigger move than it sounds.
The numbers are right on point. And yet AMD stock hit a two-month low in the days after the release.
The Long-Term Case for AMD Stock
It’s just not the 2020 numbers, but how AMD generated those numbers, that matters to the long-term case.
The core of the case for AMD stock since Dr. Lisa Su took over as chief executive officer in 2014 has been simple: this now is a better company making better products. Admittedly, even the most ardent AMD bulls likely didn’t expect this kind of success; AMD actually (and incredibly) traded below $2 as recently as early 2016.
But before Su arrived, AMD was a second-tier chipmaker that competed solely on price. The bull case now not only suggests, but requires, that it now be an innovative leader in the space. Q4 performance suggests that it is.
Look at the segment results. The Ryzen line of CPUs (central processing units) drove 18% year-over-year growth in Computing and Graphics.
Yes, PC sales did well in Q4: but unit growth for the market was only about 10%. ASPs for AMD’s C&G segment fell because CPUs are cheaper than GPUs (graphics processing units).
In other words, AMD’s unit sales rose at least 20% year-over-year, and likely even faster. There’s no doubt that Ryzen is taking market share in PCs.
The Enterprise, Embedded and Semi-Custom segment increased sales a stunning 176% year-over-year. Yes, there was some data center weakness toward the end of 2019 that surprised investors, and made AMD’s comparison a little easier. But even with that in mind, the growth is enormous. Here, too, AMD is taking share.
And it’s not taking share by pricing. If it was, gross margin wouldn’t have risen two full points (no small feat) in full-year 2020. AMD wouldn’t guide for that performance to repeat in 2021. This is a company firing on all cylinders.
Buy the Dip
To be honest, then, it’s difficult to see what exactly has driven the recent selling in AMD stock. We can speculate about potential reasons, but none really to seem make sense.
A skeptic could counter that AMD stock simply is too expensive. A 45x multiple to current 2021 consensus EPS estimates isn’t cheap, though I expect those estimates to rise as Wall Street digests the report and AMD’s guidance. (Consensus already has moved to $1.97 from $1.80 before the earnings release.)
But who really thinks, after the performance of the last few years, that AMD stock should be cheap? Between 2015 and 2020, AMD went from losing 54 cents a share (even on an adjusted basis) to earning $1.29. Revenue climbed from $4 billion (and an unprofitable $4 billion at that) to nearly $10 billion. Adjusted gross margin, again, went from 28% to 45%.
Barring an absolute panic, the market is not going to let that kind of company trade for some magically cheap earnings multiple. After this release, and after this pullback, AMD stock seems about as cheap as it’s going to get.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
