Advanced Micro Devices (AMD) is a prominent player in the semiconductor market that has been benefiting from the increasing demand for artificial intelligence and machine learning in several fields like cloud, gaming, and supercomputing domains. I am bullish on the stock.
Having delivered robust performances in the Computing & Graphics and Enterprise Embedded & Semi-Custom segments, the company is up 28% over the last 12 months. However, the stock has been witnessing lots of volatility lately due to the high inflation levels in the market and the threats posed by the coronavirus omicron variant.
A lot has been going on for AMD that can help the company potentially beat the expectations of Wall Street in the same manner as it had done in the past four months.
Instances like the increased demand for the gaming consoles indicates AMD will be getting more opportunity in the coming years to serve the requirements of organizations like Microsoft and Sony by supplying them semi-custom chips for their consoles. Such instances will have a catalyzing effect on the growth of AMD stocks.
Chris Caso of Raymond James has expressed a similar opinion on the AMD stock a few months back. He had stated that the graphics card maker had crushed the analyst expectations for its fiscal third quarter and his forecasts for January quarter revenue is even better. Caso had also reiterated an Overweight rating on the stock and had increased the price target from $110 to $140.
A Great Performer
AMD has been a terrific performer in the market in the past few years and has delivered an earnings surprise of 14%, on average, in the trailing four quarters.
The company had generated a revenue of $11.6 billion within the first nine months of 2021 itself, which is 78% higher when compared with the first three quarters of 2020. Also, during the same period, the company’s net income stood at almost $2.2 billion, indicating a massive 209% improvement.
The rising gross margins and operating expense-growth rate might have contributed to such an improvement despite the $262 million increase in its income tax expense. AMD expects to achieve a 39% year over year growth in its revenues in the last quarter of this year and 65% revenue growth year-over-year for the total fiscal year
Rising Demand in Gaming Consoles Market
Suppose one looks past the virus-related concerns that AMD may face in the coming year. In that case, the company has several catalysts that will ensure that it sustains impressive returns even in the next few years. One such catalyst is the increased demand for the company’s products in the data center and gaming console markets.
The overall demand for gaming consoles is expected to move up in the coming year to a great extent. Sony estimated it would be able to sell 22.6 million PlayStation 5 consoles in the Fiscal Year beginning in April 2022, which is a 53% increase over the current fiscal year’s projected sales of 14.8 million units.
Similarly, Microsoft is also expected to ship a greater number of units of the Xbox Series X console in 2022, as compared to 2021, responding to the rising demand.
AMD’s enterprise, embedded, and semi-custom (EESC) business is about to get a significant boost due to this enhanced demand because both Sony and Microsoft use its manufactured semi-custom chips in their respective consoles.
Last year, AMD had stated the increase in the sales of the number of EPYC data center processors and semi-custom chips have led to the growth in its EESC segment. Also, in the third quarter of this year, this particular segment had contributed 44% of AMD’s total revenue. Therefore, this continued demand will ensure a positive effect on the company’s valuation.
Growth Catalysts
The server CPU market is expected to clock $19 billion in revenue by 2023. Omdia, a market research firm, has estimated AMD’s share in the server CPU (central processing unit) market increased by almost 2% quarter-over-quarter in the third quarter of 2021. Similarly, a Bank of America analyst has forecasted that AMD will be able to command a 25% share of the server market in 2022, thus giving the company a sizable boost in the coming years.
Moreover, a Jon Peddie Research shows the sales of graphics cards might also increase to $54 billion in 2025 from $23.6 billion last year. AMD has been holding a 17% share of the GPU market, so it is about to gain from this growth in the graphics card market.
AMD’s share in the CPU market of 25% was also the highest in the last 15 years. As there is still a possibility for further gain in market share in 2022 and beyond, the company will be getting additional benefits which will be reflected in its overall value. Growth in the graphics cards market will be another booster for AMD’s growth.
Wall Street’s Take
Turning to Wall Street, AMD stock comes in as a Moderate Buy. 15 out of 25 analysts have given AMD a Buy Rating, and 10 have suggested a Hold.
The average Advanced Micro Devices price target of $144.81 represents 28.9% upside potential.
Conclusion
AMD stock has delivered impressive gains in the past years. The stock presently has a PE of 34.7 times and is cheaper than most other similar kinds of stocks. Therefore, investors looking for a growth stock suitable for their portfolios may consider this one.
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