- Analysts expect Advanced Micro Devices (AMD) growth to slow from recent record levels
- Clouds offer lower margins than PCs and game machines
- It’s still a buy and it is now a bargain
Advanced Micro Devices (NASDAQ:AMD) stock is down around 27% in 2022. This breaks a streak of gains going back to Chief Executive Officer Lisa Su’s appointment in 2014 when the stock traded near $2.
Traders are mystified and even angry. Investors like me are doubling down.
There is a good reason for AMD’s fall. Even at its Apr. 7 price of $104.30, it is trading at over 10 times revenue and 40 times last year’s earnings. Given the state of the market and the world, that is too high. There are better bargains out there.
AMD’s new push into the data center market, highlighted by its bid to buy Pensando for $1.9 billion, is also confusing people who don’t know the market.
But if you are willing to make time your ally, it is easy to justify buying AMD stock. Here’s how.
|AMD||Advanced Micro Devices||$113.05|
AMD began its rise with PCs and gaming machines. But now clouds are the growth market. AMD sales in clouds doubled in 2021. Cloud buyers are price sensitive. Data centers offer smaller margins than retail. But they make it up in volume. If you also have useful software, you can make up those margins.
AMD’s share of the server market is substantial at 16%, but still has room to grow. The cloud is how it will do that.
There are over 300 new “hyperscale” data centers in the works, which most of us call clouds. Half of the capacity is inside the U.S. The market is still growing around 20% each year. Data centers represented $185 billion in spending last year.
That is why AMD is buying Pensando. Pensando’s business is optimizing data centers, moving work around to increase performance. This lowers the total cost of ownership for data centers. Along with Xilinx, the programmable chip company that became part of AMD in February, it means AMD now has a wide line of both hardware and software for data centers.
Numbers Get Serious
Last year was awesome for AMD. Some slowing is expected as numbers grow bigger.
For its fourth quarter reported on Feb. 1, AMD earned $974 million, 80 cents per share, on revenue of $4.8 billion. Earnings were down from a year earlier, but revenue was up by 49% year-over-year. For the full year, revenue rose 68% and net income was up 27%.
Goldman Sachs (NYSE:GS) expects AMD growth to slow this year, with earnings closer to analyst estimates. Their estimate for 2022 earnings is $4.17 per share. That makes the forward price to earnings ratio for AMD just 25.
Analysts at Tipranks don’t seriously disagree. There are 21 ratings and 14 say buy it. Their average price target of almost $150 is about 32% ahead of its current trade. Even the lowest price target of $115 represents a near-2% gain.
The Bottom Line on AMD Stock
The fall of AMD stock is an opportunity for long-term investors. You can buy profitable growth of at least 20% per year for just 25 times the current year’s earnings.
AMD is, at heart, a software company. Software benefits from Moore’s Law in clouds because its online distribution cost is practically zero. Hardware, on the other hand, must be fabricated and Moore’s Second Law means those costs keep rising.
AMD depends on Taiwan Semiconductor (NYSE:TSM) and Global Foundries (NASDAQ:GFS), which was spun-out of AMD over a decade ago, to fabricate its chips. The enormous capital spending at TSM and even Intel (NASDAQ:INTC) will increase AMD’s supplies, thus its sales.
The time to buy any stock is when it is out of fashion. Last year was a bad year to buy fast-growing tech stocks, but they will come back. When they do, you’ll be in good shape if you nibble on AMD stock now.
On the date of publication, Dana Blankenhorn held long positions in AMD, INTC and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.