Growth Stocks: AMD

AMD (AMD.US) continues to see “hold” consideration by the consensus investor, in light of 2021 full-year share price performance and expectations for 2022. Taking into account factors such as competitor valuations, the potential of increases in market share and the Xilinx, Inc. (XLNX.US) deal worth $35 billion. With the merger taking place in secret in October 2021, AMD is now the fourth largest designer of integrated circuits (CPUs) in the world, surpassing Intel along the way and trailing only NVIDIA, Qualcomm and Broadcomm. Stocks surged last year on the back of deal-savvy investors and the results are now showing.

AMD stock (AMD.US) is up +55.9% in 2021, which is an incredible one-year performance in absolute terms. In relative terms, AMD also outperformed the S&P 500, which was up +30.6% over the same period.

AMD stock price performance in 2021

source: seekingalpha

AMD's stock price rose significantly in 2021 as it gained market share from key rival Intel Corporation (INTC.US) and generated strong results. Recall that Intel has been losing market share to AMD in the PC and server processor market. The processor market with Meta Platforms (FB.US) could point to a further loss of market share for INTC in this segment.

AMD's market share gains have translated into significantly better-than-expected earnings for the company in recent quarters. As per the chart below, AMD has been generating earnings above expectations for the past six quarters, between Q2 2020 and Q3 2021. This is in stark contrast to the period Q4 2018 to Q1 2021. 2020, where AMD failed to beat consensus earnings estimates. Constantly from quarter to quarter.

AMD earnings per share surprise in the last 12 quarters

source: seekingalpha

En el primer mes de 2022, el desempeño del precio de las acciones de AMD ha sido decepcionante, con una caída de sus acciones de -23,1 %. Por el contrario, el S&P 500 solo disminuyó un -8,7% en lo que va del año. A continuación observaremos las valoraciones de Advanced Micro Devices tras la reciente corrección de precios.

AMD Stock Price Performance YTD 2022

source: seekingalpha

Is AMD overrated?

Apparently, AMD is correctly valued today.

AMD's valuations are right in the middle of the range based on the peer-to-peer comparison in the table above, and this is also in line with the companies' respective revenue growth outlook. A higher-than-expected CAGR for AMD over the next three years is better than INTC's, but lower than NVDA's, and this is reflected in the difference in valuation multiples between the three stocks.

There are also two key issues to watch out for, pointing to a mixed outlook for AMD in the near term and suggesting that the company's stock is fairly valued.

First, AMD could continue to gain market share in server processors, but Intel could pose a tough challenge in the PC processor market. A recent victory for AMD in the server processor market comes from Nokia Corporation (NOKIA.FI), which announced on January 27, 2022 that it has selected "3rd generation" AMD EPYC processor-based servers to offer Nokia Core software products to customers use energy more efficiently."

Second, AMD first announced the proposed acquisition of Xilinx in a press release dated October 27, 2020, with this transaction expected to be completed in the first quarter of 2022. In the press release issued on October 2020, Advanced Micro Devices also stated that this deal "expands AMD's fast-growing data center business" and would "immediately increase AMD's margins, earnings per share and free cash flow generation" .

On the other hand, AMD's overall revenue growth in FY2022 (December 31, 2022) could decline once the Xilinx deal is finalized and the financials of the two companies are consolidated.

Based on market consensus, AMD revenue growth is expected to slow from +65.3% in FY2021 to +19.4% in FY2022 (January 1, 2022 to December 31 of 2022). It is likely that these numbers did not take into account the Xilinx deal and more optimistic growth expectations are more modest for XLNX.US.

Sell-side consensus figures point to a much smaller +6.8% revenue increase for Xilinx for the financial period between April 1, 2022 and March 31, 2023; and Xilinx's 12-month revenue is about a quarter of AMD's. In other words, AMD's revenue growth for fiscal 2022 could be diluted as a result of the Xilinx deal.

In conclusion, we believe that AMD shares are correctly valued

But, is AMD a good investment for the long term?

It's debatable whether AMD stock is a good buy now, as its stock isn't undervalued. But AMD will most likely be a good long-term investment when its valuations become more attractive in the future.

At its most recent Financial Analyst Day on March 5, 2020 (the previous Analyst Day was held in May 2017), AMD set a goal of achieving +20% annual revenue growth and generating profit margins. gross profit and operating profit above 50% and in the mid-20s percentage range, respectively over the long term.

These are very impressive financial targets, but AMD is in a good position to meet and even exceed its own expectations.

On the profitability side, the Xilinx deal will help AMD grow revenue from the higher-margin data center segment, leading to a more favorable sales mix and higher overall profitability going forward.

Technical analysis

AMD accumulates a 40% drop from ATH, equal to the relative correction during the start of the pandemic (see yellow boxes, linear scale). The support coincident with the relative high at $99 is the turning point in the price.

Since then, AMD accumulates 14% in its price from support and its closest target is $122.5 per share. The sector points to a significant growth of AMD compared to its competitors and could recover in the medium term its last all-time high of $164.4.

AMD will publish its earnings report after the closing bell .

Dario Garcia, EFA
XTB Spain