Due to the chip shortage, chipmaker Advanced Micro Devices (AMD) was already in an excellent position. A market with electronics, car, and video game companies alike on the back foot means a big win for chipmakers. Recent news from AMD in connection to its partnership with Tesla (TSLA) only improves the situation.
I'm very bullish on AMD right now because it's in a great market position, and things appear only to be getting better. (See Analysts' Top Stocks on TipRanks)
AMD's year-to-date stock chart is a success story in one picture. The company spent the first half of 2021—and a little of the second half—in the doldrums. The company struggled in the lower $80 range for months, trying valiantly to get back to the upper $80 range it saw in late 2020. With July's final days, though, that all changed.
AMD stock exploded upward, beginning a cycle that's still going on today. The company went from just barely out of the $90 range in late July to a high above the $160 mark in late November. It's given up ground since then, but it's pushing its highs for the year. (See AMD stock charts on TipRanks)
The latest news for AMD is even better. It recently expanded its partnership with Tesla. The said partnership has already been good for AMD, but it may be about to get even better. Tesla's work in expanding both its line of vehicles and its factory presence has been substantial, and that may mean a lot more chips demanded of AMD.
AMD outfits the Tesla Model S and Model X vehicles with a somewhat customized chipset for the vehicles' infotainment systems. The chips AMD is bringing out are pretty potent. Not only does it call for a Ryzen embedded processing unit, but it also calls for a graphics card built on RDNA 2 architecture. Reports note that such a setup is sufficiently powerful to run some of the biggest triple-A titles out there, including "Cyberpunk 2077."
A New Explosive Leg Upward?The recent chip shortage has put a lot of power into chipmakers' operations. For a while there, pretty much every chip ever made was sold to somebody. A perfect sales rating is the dream of every sales rep out there. It's a dream because it almost never comes true.
A company that sells literally everything it makes exposes itself to substantial risk. It cannot build an inventory, which means any hiccup in production slows down the entire sales process. That runs the risk of engendering bad feelings toward the company. If the company develops a reputation for poor order fulfillment, then competitors may swoop in. That's where the phrase "eating the competition's lunch" came from.
However, for AMD, things are looking fairly bright. With Tesla looking to ramp up its production, it will need more chips. New Gigafactory installations and rumors of new ones in China and beyond only help this assertion. That's good news to start with, but it's the implications that help out here.
Tesla's plan to roll out a new electric vehicle for the kiddie market will likely light a fire under AMD for chips as well. The new vehicle, called the Cyberquad, is a four-wheeler geared toward children aged eight and up. It offers a top speed of 10 miles per hour and a range of 15 miles. It also boasts a $1,900 price tag.
If AMD can reliably meet Tesla's demand for new chips—and do so regularly—it's likely to develop a reputation in the vehicle manufacture field. With reports noting that Ford (F) is looking to make its own chips in the wake of the ongoing chip shortage, there's a clear demand for the same out there.
It's a demand approaching desperation on some fronts. Carmakers don't become chipmakers unless there's a clear need. The two processes aren't very closely related.
If AMD becomes the new gold standard for automotive chipmaking, it may get fresh demand from all the other chipmakers out there.
Wall Street's TakeTurning to Wall Street, AMD has a Moderate Buy consensus rating. That's based on 14 Buys and eight Holds assigned in the past three months. The average AMD price target of $141.95 implies 1.8% downside potential.
Analyst price targets range from a low of $113 per share to a high of $180.00 per share.
Concluding ViewsMD was already in good shape, thanks to the chip shortage. Granted, it's selling close to the top of its range right now. That's something of a bad sign for those who want to buy in right now. However, a new Tesla expansion and the potential new reputation as a car chip provider could mean big things for AMD.
Regardless, it would be a good idea for AMD to up its production capabilities, and soon. It's got buyers for almost everything it makes right now. That may be the case for some time to come. It's easy to be bullish on AMD with a picture like that in play.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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