Why Advanced Micro Devices (NASDAQ: AMD) Is Worth Considering

Even with the S&P 500 index finding itself down more than 1.5% yesterday, as markets logged one of their worst days in months, shares of Advanced Micro Devices (NASDAQ: AMD) found a bid that sent them up 0.8% on the day. The astute observer might interpret this as a sign that AMD is a quality name that mightn’t have shone as brightly as some of the stocks that are now tumbling hard, but is now ready to to start ticking higher. 
Shares of the Santa Clara headquartered chip maker has been trading mostly sideways since hitting an all-time high last August, which at the time capped a startling 400% run over the previous two years. It’s fair to say that investors have been taking stock of the company as it moves into the new decade, and there are signs afoot that a fresh rally is in the oven. 

Multiple Upgrades

Only last week, the folks over at Citi upgraded their rating on AMD shares to Neutral and gave the stock a price target of $95. This suggests there’s the upside of around 10% and removes what was one of the few remaining, and heavy-looking, Sell ratings on the stock. In a note to clients, analyst Christopher Danely wrote "our checks indicate AMD share gains are finally accelerating in the server market, especially at hyper-scale companies such as AWS and Google. We expect momentum to continue and Intel (NASDAQ: INTC)  gross margins could dip to the 40s, similar to the last AMD product cycle.”

Danely also said he expects AMD's share gains to cross the 20% from current levels by 2022, noting it "can continue its growth trajectory due to continued production delays at Intel, which we believe might happen for 7nm products as well."

The team from Goldman Sachs went one further the previous week, as they moved AMD shares up to a Buy rating from Neutral, and placed them on their conviction buy list. They’re thinking that Wall Street has underestimated the company’s near and long term revenue growth and margin expansion potential. Despite the stock’s lackluster performance in the past year, they’re of the opinion that we could be looking at a sleeping giant that’s starting to wake up. Their $111 price target and the 30% upside it implies speaks volumes and should be enough to get the blood pumping in any red-blooded investor. 

Sleeping Giant

This sleeping giant analogy echoes comments from Bank of America, who earlier this month named AMD as an “under the radar” stock that has massive catch-up potential. Analyst Vivek Arya wrote about how their server market share is trending back toward the prior 25% peak versus the current 10%, which should drive EPS of $4 versus the $2.65 consensus estimates for 2022. In addition, the company’s supercomputing business is up five times on the year to almost 10% share. But as mentioned above, none of this seems to have filtered through to the stock price yet. Arya is also impressed with the "consistency" of AMD's roadmap and the potential tailwind that could come from future Intel product releases. 

On the whole, there’s not a lot to dislike about AMD right now. Their price-to-earnings ratio of 36 could hardly be called overvalued in the context of some of the triple-digit ratios that their Silicon Valley peers maintain. Perhaps this is why their shares were able to tick higher on what was very much a blood-red Monday for most of the equity markets. 

They’re on track to cross $5 billion in free cash flow next year, and have an impressively wide gross margin, something investors love to see when considering a company’s potential growth rate. AMD reports earnings next week and there’s definitely a growing sense that if they smash the consensus as they have so often in the past, it might be the last time we ever see the stock trading for double digit prices.