It wasn’t that long ago that Advanced Micro Devices (NASDAQ:AMD) looked like it wouldn’t even survive, let alone thrive. A few years later though and this stock has been a life-changing holding for some investors. AMD stock has gone from $2 in 2016 to almost $100 in January of 2021.
For investors that don’t understand this industry, they may think this run is being fueled by some sort of easy-money policy at the Federal Reserve. Where dovish monetary policy is helping to drive a disconnect from reality and fueling a period of overvaluation.
Actions from the Fed certainly help the bull market. However, that isn’t the reason AMD stock has had such success. No, that’s been the strong leadership from management and the company’s market share.
As of now, there’s no reason to bet on that changing anytime soon.
Don’t Underestimate AMD
Day by day, technology becomes more powerful. Graphics get better, speeds get quicker and users demand more from their products. Whether that user is an at-home gamer on a PC or a data scientist mining millions (or billions) of pieces of information.
To make these tasks a reality, a company like Advanced Micro Devices is needed. The company’s graphics processing units (GPUs) have improved considerably in the past few years. Coupled with a tightly-run ship and taking market share from its competition, the company has vaulted toward the top of its industry.
The question then becomes, is its move higher sustainable? I believe the answer is yes.
AMD has secular growth driving its business right now. After a robust 2020, consensus expectations call for another strong year in 2021. Analysts expect revenue to jump 38% to $13.5 billion and for earnings to grow 53% to $1.97 a share.
At roughly $80 a share, that values AMD stock at about 40 times forward earnings. That might get some bemoaning from the value crowd, but this is a high-growth stock. Its valuation (at least based on profit) has been higher than this in the past and that hasn’t slowed the stock’s run at all.
Plus consider its forward estimates, which call for 28% earnings growth in 2022. On the revenue front, analysts expect roughly 15% growth next year and 18% growth in the following year.
Forward estimates are tough to get a handle on — particularly for this group. The market previously underestimated AMD by a wide, wide margin as the company ultimately saw a huge pull-forward in business in 2020.
Let’s put it this way. Its 2020 results ended up beating what analysts expected in 2021. It was a huge year.
And now analysts expect almost 40% revenue growth this year. Who’s to say estimates for 2022 and 2023 aren’t too conservative?
Breaking Down AMD Stock
Advanced Micro Devices is years ahead of where the market thought it would be a few years ago. To say it hasn’t been priced like that wouldn’t be fair. However, it wouldn’t be fair to say that AMD stock has rallied far too much either.
The stock is up about 100% over the past 12 months, but that figure is cherry-picked, because it comes right off the 2020 lows. From the pre-coronavirus 2020 highs, shares are up “just” 32%. Further, AMD is flat over the last six months and actually down 15% so far this year.
That’s despite all of the extra growth AMD has harnessed over the past 12 months.
For long-term bulls looking to buy into attractive secular growth themes, AMD stock is a must-buy holding. Then you take into consideration all that CEO Lisa Su has done and the entity becomes even more attractive.
The company has bolstered its assets and notably reduced its debt. This balance sheet overhaul has allowed Advanced Micro to drop $35 billion on a big acquisition. Granted, it’s an all-stock deal, not cash, but without the company’s financial improvements, AMD would have never been able to make the move.
Further, management expects the deal to be “immediately accretive to AMD margins, cash flow and EPS.”
That’s great news, because an improvement to its margins have already allowed the bottom line to expand considerably, while free cash flow has surged in the right direction. Everything the company is doing should have bulls’ attention right now.
Currently down over 20% from the highs, I would be a buyer of the current dip.
On the date of publication, Matt McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article held a long position in AMD.
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