Growth Stocks: Advanced Micro Devices

Advanced Micro Devices, Inc. (AMD.US) a technologically strong semiconductor company with an attractive growth history. It is well positioned to retain a variety of macro trends and has significant growth potential, especially in the data center space. However, its shares have fallen quite a bit in recent months: buyers were too greedy at some points in 2021, and it looks like some investors are panicking today. AMD priced well below $90 looks like a very solid long-term investment for those who can withstand pronounced short-term volatility.
 
What worries the market?
 
Advanced Micro Devices is exposed to a variety of industries. This includes data centers, personal computers, video games, cryptocurrencies, etc. Naturally, not all of these will work well at the same time. In recent months, investors have started to worry about some potentially negative developments, although some may be being exaggerated. The price of cryptocurrencies has fallen recently, for example due to rising interest rates and tax pressure. This means that mining cryptocurrencies like Ethereum has become less attractive, reducing the demand for AMD processors that can be used for that (important: GPUs are not used for Bitcoin mining).
 
A drop in PC sales is another macro element that could hurt AMD's near-term sales prospects, though it shouldn't have a big impact as this sector is highly consumer-dependent. High inflation means some consumers have less money available to spend on discretionary items like PCs, and the Fed's tightening could induce an economic slowdown, which could affect demand for PCs by businesses and corporations. These trends could lead to reduced PC sales in the future, but this should not be a big drawback for AMD, however.
 
In the following graph we see how global PC sales have behaved in recent years:

PC sales increased by just 15% between 2006 and 2020, and actually fell in the period from 2010 to 2020, falling by more than 20% in that decade. Still, AMD has managed to grow its revenue by more than 200% over the last 10 years, according to YCharts, showing that AMD's success isn't closely related to the PC market as a whole.

Instead, other factors are far more important to AMD's continued success. This includes other lines of business like data centers, of course, but even in the PC business, AMD's market share performance and average selling price are more important factors than the total number of PCs. sold all over the world.

AMD has also benefited from the boom in video games in recent years. Consumers invested more in equipment for it, particularly during the pandemic. With the pandemic coming to an end and consumers going out more often, these pandemic tailwinds for the video game industries have ceased to exist. This results in a not very strong sales outlook for the current year compared to the industry during 2020 and 2021 due to the pandemic, but this is more of a short-term issue. In the end, the megatrend of spending more time and money on games will continue, even if 2022 is something of an outlier because many consumers will want to go out and experience things after two years in which they didn't.

Forecasts see the global gaming market growing at 9% per annum to 2030 (base year 2021), implying that AMD's gaming exposure will be positive in the long run, though 2022 may not be too long of a year. strong for that business. For long-term investors, this shouldn't be a big deal.

In summary, there are some potential obstacles, but none of them seem to be detrimental to the company at all. In fact, both AMD's Board of Directors and analysts continue to predict a strong 2022, so the huge drop in the stock price from $164 to $85 per share seems overblown. AMD has lost almost half of its market value, even though earnings per share and revenue estimates have not been lowered in the last six months:

source: seekingalpha

There have been 12 upward revisions to AMD's EPS in the last three months, compared to only one downward revision. Even better, there were 13 revenue upward revisions in the same time period, with zero downward revisions. The EPS consensus estimate trend in the chart above also clearly shows that estimates for all years (2022 to 2025) are substantially higher than half a year ago and even three months ago. When we look at this, the high share price is quite surprising and the drop in share price seems even more so, in fact it could be considered exaggerated. This doesn't mean that AMD was a good buy half a year ago at $150 or even $160, in fact, it wasn't.
 
Chasing a stock that had risen quite a bit and was valued very expensive was a mistake back then. But today, with the business doing even better than expected and the share price cut in half, greed no longer seems to be a factor; instead, stock price performance is more reminiscent of panic or (potentially exaggerated) fears
 
Good evolution of the core business
 
The company continues to deliver very convincing results despite these potential obstacles. In its most recent quarter, AMD increased its revenue by 49% year over year. Importantly, this still does not include the impact of the Xilinx acquisition that AMD closed in February 2022. Thanks to this very strong revenue performance, Advanced Micro Devices was also able to grow profits at a considerable pace. Share earnings came in at $0.92, up 77% year over year. The company was able to grow profit faster than revenue thanks to the impact of operating leverage and due to the fact that the very tight chip market allowed AMD and many of its competitors to increase their margins compared to previous years.
 
For 2022, the outlook is quite positive. AMD CEO Lisa Su herself stated:
 
“Each of our businesses performed extremely well, with data center revenue doubling year-over-year driven by the growing adoption of AMD EPYC processors among enterprise and cloud customers. We look forward to another year of significant growth in 2022 as we grow our current portfolio and launch our next generation of PC, gaming and data center products."
 
Demand for data centers will remain very strong in almost any environment, even if inflation and a potential economic downturn may put some pressure on PC sales. Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (FB) and many more will continue to invest in new data centers, and AMD's product lineup is attractive, demonstrated by the fact that the company has gained market share considerable. In this space, with the data center business being particularly profitable for AMD, its strong outlook should more than offset potential headwinds in other areas, such as PC processor sales.
 
Let's see the risks
 
Of course, AMD is not a risk-free investment. An escalation of the conflict between China and Taiwan would hurt the company a lot due to its dependence on Taiwan Semiconductor Manufacturing Company (TSM.US), for example. Although a war between China and Taiwan is not very likely in the foreseeable future, but if it were to happen, AMD and other companies that depend on TSM would feel a great disturbance in their operations.
 
If competitors come up with more attractive designs, AMD could lose market share in important markets, but this doesn't appear to be an issue for the foreseeable future. However, with Intel (INTC.US) investing heavily in R&D and new technologies, it could present more competitive products in the second half of the 2020s, although it is slightly behind the evolution of AMD. Therefore, investors should keep an eye on market share trends and new product announcements from AMD and its competitors.
 
Conclusions
 
Advanced Micro Devices (AMD.US) will present its first quarter results tonight (May 3), after the market close. The consensus estimate for EPS is $0.92 (-3.2%) and the consensus estimate for revenue is $5.58 billion (compared to $3.45 billion in the prior year quarter).
 
Taking a quick look at the growth levels of the company compared to its Competitors:

source: seekingalpha
 
Over the past 2 years, AMD has beat EPS estimates 100% of the time and beat revenue estimates 100% of the time.
 
Over the last 3 months, EPS estimates have seen 11 upward revisions and 0 downward revisions. Revenue estimates have had 10 upward revisions and 0 downward revisions. While rivals struggled with a tight chip supply market, AMD used that dynamic to boost its margins.
 
AMD's better-than-expected performance was buoyed by strong demand for its processors, which are used in a variety of facilities and devices ranging from data centers to PCs to gaming consoles.
 
Technical analysis
 
AMD has recently found a key support in its corrective process, the 84.2 dollars per share. This area was a checkpoint in July 2021 to break the psychological zone of 100 dollars per share for the first time.

In turn, these $100 would be the level of control to take into account in the short term, so that the company can attack the main guideline. Bearish from its all-time highs above $160. Both the “abc” and “ABC” structures project upside targets similar to the price recovery seen in AMD when the $100 was a key support zone in early 2022.
 
Fundamental support at $72.73 per share is the area that AMD should not retest.
 
Dario Garcia, EFA
XTB Spain