Among technology investors, Advanced Micro Devices (NASDAQ:AMD) is one of the go-to names investors have flocked to in recent years. That’s no surprise. After all, AMD stock is one of the most consistent growth plays on the NASDAQ over the past five years.
How consistent? Investors who bought AMD stock five years ago have booked returns of more than 2,200% over this time frame.
That’s not bad. However, whether or not this growth story can continue is another question.
In this article, I’m going to discuss why I’m very bullish on AMD stock right now. Specifically, I’m going to focus on the market share capture potential of what is still a “small” player in the semiconductor space.
Don’t Be Fooled by AMD’s Size
AMD is the smallest of the “big 3” in the U.S. CPU and GSU market. Its rivals Intel Corporation (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA) have market capitalizations roughly three-times that of AMD. These companies also own a significant market share today that AMD is yearning to capture.
However, the company believes it is on the cusp of continuing to nab market share from its competitors at a relatively rapid pace. According to AMD’s investor presentation, the four pillars AMD’s management team would like investors to focus on are:
- High-performance computing leadership
- Disruptive solutions combining CPUs and GPUs
- Strong and predictable execution
- Best-in-class growth franchise
I think that just about sums up AMD stock. I’m going to go home now.
Just kidding.
Indeed, I think these central tenets of AMD’s strategic outlook can really be split into two buckets: product superiority and predictable growth. Let’s look at these closer.
Product Superiority a Key Competitive Advantage
Product superiority is the key factor I think most AMD investors focus on.
Indeed, the company’s Ryzen mobile and desktop processors are branded by the company as “the world’s best laptop processors” and “the world’s fastest gaming processors.” That’s not bad, even if AMD does say so itself.
Additionally, the company’s GPU segment (where it’s really struggled) is looking positive. Driven by extremely high demand from growth in computing power needs (think cryptocurrency mining), stocking issues have plagued the sector. Indeed, many believe these shortages will last until mid-2021.
AMD’s product line has become much more competitive with Nvidia’s, though AMD is lagging in terms of market share here. However, if AMD can sufficiently ramp up production to meet this excess demand, there’s an argument that can be made for some market share capture.
Finally, the recent news coming from Dell Technologies (NYSE:DELL) that the company will be using AMD Epyc chips in five of its 17 server models being released in 2021 is a big deal.
It’s believed Dell’s shift to providing excellent performance at a reasonable price is a key factor in integrating such a high percentage of AMD chips in one of its largest server launches in history. Customers are climbing aboard AMD, for good reason.
Growth Key to Owning AMD Stock Long Term
Over the past 12 months, AMD posted revenues just shy of $10 billion. That’s up 45% over 2019 numbers. Not bad growth, indeed.
Importantly, net income more than doubled over the past year. What once looked like an unachievably-high valuation multiple is now within reason.
Accordingly, many fundamental-oriented investors may be enticed by this growth play. The company’s forward projections are just as enticing.
In 2021, AMD’s forward revenue guidance is for 37% growth. While not as good as 2020, that’s still a heck of a jump. Any company growing at this pace (and at this size) deserves a second look.
Indeed, if the company can continue to capture market share as it has been in recent years, such projections are very realistic. AMD’s forward revenue of $13.4 billion and gross profit of $6.3 billion (based on forward expectations of a 47% gross margin) would make this company’s valuation even more attractive.
Disclosure: On the date of publication, Chris MacDonald held a LONG position in NASDAQ:AMD.
