As the economic fallout from the global health crisis has created new winners and losers on Wall Street, Advanced Micro Devices (ticker: AMD) has been a standout.
This semiconductor stock has more than erased losses sustained during the mid-March sell-off this year, and its shares are up more than 70% year to date at the time of this writing.
Those strong gains in its stock price have helped position the tech company to be able to expand with an acquisition and have certainly made shareholders happy. That said, the ascent of the stock may give potential investors pause when they think about buying at these levels.
As more people work, learn and seek entertainment at home, the chips that power computers and internet capability have become increasingly important, helping to fuel demand for AMD’s central processor units for personal computers as well as its products for data centers.
“The pandemic has been a key accelerator of many trends that companies such as AMD touch on,” says Pedro Palandrani, research analyst with Global X ETFs. Beyond the pandemic, the world’s growing reliance on cloud computing infrastructure and increasing connectivity is making digital memory and processing more important than ever, he says.
AMD at a Glance
Headquartered in Sunnyvale, California, AMD is a global semiconductor company that develops computer processors and related technologies for businesses and consumers.
Its computing and graphics business segment handles desktop and notebook processors and chipsets, discrete graphics processing units and professional graphics.
Meanwhile, its enterprise, embedded and semi-custom segment makes server and embedded processors, along with system-on-chip products designed to deliver image and video processing.
On Oct. 27, along with reporting blowout earnings, AMD said it would buy rival chipmaker Xilinx ( XLNX) for $35 billion in an all-stock deal. That’s basically a doubling down on AMD’s push into the data center space and is seen as a blow to competitor Intel ( INTC).
Alongside the news of further consolidation in the semiconductor space, AMD reported quarterly results that beat expectations for its top and bottom lines. The company reported adjusted earnings per share of 41 cents on revenue that grew by more than 55% to $2.8 billion. AMD also said it expects 2020 revenue to grow by about 41% year over year, up from previous guidance of 32%.
Pros of Buying the Stock
While Intel has stumbled on the manufacturing side, AMD became more nimble after spinning off its manufacturing operations years ago. AMD has begun to leapfrog Intel visibly in important technical areas this year, including the production of 7-nanometer chips, which Intel is pushing back to 2022.
That nimbleness means AMD can focus on designing chips, and it makes the company’s cash position more stable, says JoAnne Feeney, portfolio manager with Advisors Capital Management.
Feeney says AMD has a “tremendous opportunity” to take share from Intel in the personal computing space as well as the higher-margin server business. Another possible tailwind is the potential for AMD to gain against Nvidia Corp. ( NVDA) in graphics processing chips, she says.
Cons of Buying the Stock
A risk to buying AMD stock is that some of the potential market share expansion is already baked into the share price, Feeney says. While she thinks people are underestimating how much market share AMD could gain, it does remain an open question as to whether the company gains more than investors and analysts are currently thinking.
Competition is also a potential headwind. Over the long term, companies involved in some of the same spaces as AMD, such as Nvidia — which has also been in acquisition mode, agreeing to a record-setting $40 billion deal to acquire chip designer Arm just last month — are also going to benefit from the push into autonomous vehicles, 5G technology, gaming and data centers, Palandrani says.
Another risk, as with all acquisitions, is that AMD might stumble in integrating Xilinx. That would mean it might take longer than expected to fully realize the value of the combined companies. And there’s always the risk that it’s overpaying.
Bottom Line: Should You Invest In AMD Stock?
As of Wednesday, the consensus rating for AMD among Wall Street analysts was a “buy,” according to MarketBeat. Among the analysts, 22 had “buy” ratings, 13 had the stock at “hold” and two had “sell” ratings.
Feeney says AMD is a buy for aggressive growth investors. But for more conservative investors, or those focusing on growth at a reasonable price, the name is too expensive. Other companies with exposure to some of the same tailwinds include Qualcomm ( QCOM) and Broadcom ( AVGO), she says.
Investment research firm CFRA increased its 12-month price target to $100 from $90 because of its outlook for AMD’s growth, improving financial position and share gain.
“We see significant share gain on the horizon within its server business, with considerable interest for its next-generation Milan server processors set to begin volume shipments in early ’21,” CFRA said in a note.
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