It’s tempting to believe that Advanced Micro Devices (NASDAQ:AMD) stock needs a breather. Shares have doubled from March lows. They’ve gained 30% in just the last six sessions.
And at this point, valuation does look a bit questionable. AMD stock trades at 47x the 2021 consensus earnings-per-share estimate. That’s a big multiple for a chip name, if more reasonable against the backdrop of multiples in tech more broadly.
But this is a case where investors shouldn’t be looking at past prices or current valuation. They should be looking at the future opportunity. That opportunity is enormous — and recent news suggests Advanced Micro Devices can capitalize.
To be sure, some of that opportunity has been priced in by the recent rally. But I believe there’s still plenty of upside left for AMD stock.
Intel’s Stumbles
The breakout in AMD stock has been driven by two key pieces of news. The first was a disappointing earnings report from Intel (NASDAQ:INTC).
Intel, of course, is AMD’s biggest rival in CPUs (central processing units). Intel, in fact, historically has dominated AMD in the category. It was only a few years ago that the idea of Advanced Micro Devices competing directly with Intel was almost laughable.
Intel was the gold standard not just in CPUs, but perhaps in the entire semiconductor industry. AMD, meanwhile, eked out its revenue offering low-priced chips primarily for low-end personal computers. It was not an attractive business model: AMD stock traded as low as $2 in early 2016.
Obviously, the story is completely different now. AMD is firing on all cylinders. Its EPYC line has made the company a real threat to Intel in CPUs, with data centers a key opportunity. Radeon GPUs (graphics processing units) potentially expand the company’s market, moving the company onto Nvidia’s (NASDAQ:NVDA) turf.
Meanwhile, Intel has seen stumble after stumble, capped by the disclosure of a significant delay in its move to 7-nanometer. AMD, thanks to its manufacturing partner Taiwan Semiconductor (NYSE:TSM), is already at 7nm.
Now AMD looks like the better company. And that raises a hugely intriguing question for AMD stock.
Can AMD Catch Intel?
That question is this: can AMD become bigger than Intel?
It seems like a ludicrous question. And from a revenue standpoint, it might be. Over the past four quarters, AMD has driven $7.65 billion in sales. Intel has generated more than ten times as much.
But from a valuation standpoint, it’s not as crazy as it sounds. It’s certainly not as certifiably insane as it would have sounded just a couple of years ago. AMD is growing at an impressive clip. Operating income nearly tripled in a blowout second quarter (the second piece of key news underpinning the rally in recent sessions).
Meanwhile, analysts expect Intel earnings to shrink next year. Over time, the disparity in the two companies’ growth rates is going to significantly narrow the fundamental gap. And based on what we know now, investors are going to apply a premium to AMD stock relative to INTC. (Again, something that would have seemed insane just a few years ago.)
Intel has a market capitalization over $200 billion. AMD is at $97 billion as I write this. It’s certainly not hard to imagine AMD running down Intel over the next decade, based on current trends. That would suggest substantial upside in AMD stock, which might triple assuming Intel stock rises at a slow pace.
The Broad Case for AMD Stock
Again, it might be too much to ask for AMD to surpass Intel. Nvidia will take some of the market share in data center.
It’s not out of the realm of possibility, however. Few would have argued in 2014 that Nvidia would be worth more than Intel. Even tech experts didn’t foresee Amazon (NASDAQ:AMZN) developing a cloud business that likely is worth more than Oracle (NYSE:ORCL) and IBM (NYSE:IBM) combined.
There’s a simpler point to make, however. As long as AMD keeps delivering — and the Q2 report shows it’s right on track — AMD stock is likely going to keep rising. The opportunities in gaming, cloud and even PCs (which have defied the most negative predictions) suggest literally decades of growth. 47x forward earnings is not that expensive in the context of those opportunities.
Meanwhile, as I’ve written before, it pays too to look around the market. At least over the past few years, it has been a huge mistake to sell a quality growth story over valuation concerns. Between low interest rates and massive, life-changing tech trends, investors are showing an increasing willingness to pay for growth.
That may change at some point, though I don’t believe that point is soon. In the meantime, investors should be looking for quality secular growth stories. AMD looked like one of those stories before the recent rally, and looks even more like one after the recent news. That’s more than enough to suggest that AMD stock has more room to run.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
