Summary:
AMD stocks show strength as the company gains more market share from Intel.
These gains translate into robust earnings growth for AMD this year, despite chip shortage constraints.
Analysts continue to have a favorable view of AMD stocks despite the strong run this year.
Advanced Micro Devices (NASDAQ:) stocks are gaining momentum after a slow start to the year. Their 45% increase in the past quarter is about three times the return of the benchmark.
This strong rally leaves investors wondering how far this rally could go, especially after the stock's rise of more than 1,500% over the past five years?
There are three key catalysts that support our view that AMD is in a strong position to outperform its semiconductor competitors in the coming years, making its stock an ideal candidate for any growth portfolio. Here's a closer look:
1. Market Share Gains
One of the main drivers of AMD stock momentum is the weakness exhibited by one of its main competitors, Intel (NASDAQ:).
After decades lagging behind Intel, the world's largest chipmaker, AMD has been catching up in recent years. AMD divested its chip manufacturing facilities over a decade ago and now relies on others to manufacture its products, including Taiwan Semiconductor Manufacturing (NYSE:), which runs some of the world's leading chip manufacturing plants.
That outsourcing strategy helped AMD at a time when Intel had a series of manufacturing setbacks, repeatedly falling behind in introducing new chips. For example, this year's release of the EPYC 7003 server processors is proving to be a breakthrough for AMD and its server market.
With outside reviewers saying the new chips offer more than double the performance of Intel's best, AMD's market share gains in this lucrative, high-margin server category are likely to accelerate this year, leading to to a significant profit increase.
Moreover, it has not only penetrated into servers. AMD's other business areas – from traditional PCs to gaming – are also booming. The company makes the core processor chips for Microsoft's (NASDAQ:) and Sony's (NYSE:) next-generation consoles. Demand for those devices has exploded during the pandemic.
AMD has also benefited from another industry, selling data center processors. That segment has taken off with the introduction of new generations of high-performance chips in recent years under Chief Executive Lisa Su.
Until recently, Intel's data center unit served more than 99% of the market for chips that form the core of corporate networks and Internet infrastructure. But that lead is under threat given the years of struggles in Intel's manufacturing activities.
Alphabet's (NASDAQ:) Google Cloud division said in June that it will offer cloud computing services based on AMD's latest data center chip. Cloud computing providers such as Google and Amazon (NASDAQ:) are some of the largest buyers of data center chips.
2. Earnings momentum
These market gains translate into robust earnings growth for AMD, providing solid reason for investors to remain optimistic about the company's prospects. In the second quarter, profits more than tripled to $710 million and sales rose 99% to $3.8 billion, helped by growing demand for high-end processors such as the Ryzen and Radeon.
AMD also issued a bullish forecast for the third quarter, forecasting revenues to be about $4.1 billion, ahead of analysts' forecasts. The company also raised its annual outlook and now expects sales to grow by 60%, compared to a previous forecast of 50% growth.
Gross margins increased above , and went from 43.9% in the second quarter of 2020 to 47.5%, while EBITDA margins (earnings before interest, taxes, depreciation and amortization) also increased to 24.4 % compared to the 12.7% AMD reported for the same period a year ago.
These gains come as AMD focuses on selling only the most profitable chips, leaving the bottom end of the market to Intel.
Su told investors in a conference call last month:
"We are targeting the most strategic segments of the PC market. We believe that the data center business will continue to be a strong driver for us in the second half of the year."
This improvement in the company's top- and bottom-line profitability makes AMD a fast-growing and fundamentally robust company. Over the past three years, the company's cash flow generation has improved significantly, with operating cash flows increasing to $1.07 billion in 2020, from just $34 million in 2018.
AMD is also better positioned to perform as chip shortages hurt many industry players during the COVID-19 pandemic. What sets AMD apart is its long-standing relationship with its main supplier, TSMC. This year, TSMC said the "high-performance computing" segment, where AMD's operations are located, will be a "key growth engine" for the foundry business.
3. Analysts Turn Bullish
AMD's rapidly growing market share and track record of exceeding expectations have prompted many top analysts to turn bullish on its stock. Of 38 analysts surveyed by Investing.com, 23 have a buy recommendation for the stock, while 15 are neutral.
Chart: Investing.com
Bank of America Securities analyst Vivek Arya, who has a $120 price target for the stock, said in a note that a potential slowdown in Intel's product releases and AMD's recent deal with Google point to further growth. of the data of the company center affairs.
In addition, AMD's share of the supercomputer market has increased more than twice in the past six months and five times in the past year, demonstrating that "AMD's improved competitiveness in HPC, a strong leading indicator for future cloud/enterprise momentum," according to his note, quoted by CNBC.com.
BMO Capital Markets analyst Ambrish Srivastava became optimistic about AMD stocks, acknowledging that he missed the mark as the company's strong execution continued. He raised his target price for AMD to $110 from $80 in a note quoted by Market Watch.
Srivastava previously thought estimates for AMD would prove too optimistic, but earnings estimates for 2021 and 2022 have now risen sharply since its downgrade in January, and he predicts "continued upward trend," especially as AMD begins to rally designs it has already won on the data center side, from high-performance computing to enterprise, including CPUs and GPUs. "
Added the note:
"(The Company) has now performed and delivered to a point where it has established itself as a viable alternative to Intel in the near future."
Bottom Line
There are plenty of strong reasons to believe the stock's current upward trajectory will continue, given AMD's earnings growth, its superior execution and its ability to capture market share from Intel in large and lucrative arenas." s, including data centers.
