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Will Competition Chip Away at Advanced Micro Devices’ Explosive Growth?

5 years 2 months ago

Advanced Micro Devices (AMD) is a global semiconductor company that operates two business segments: Computing and Graphics, and Enterprise, Embedded, and Semi-Custom.

The main value for AMD comes from intangible assets stemming from its intellectual property. Its x86 instruction set architecture license and expertise in chip design give it duopoly status alongside Intel in the personal computer and server markets. In particular, AMD has recently partnered with Taiwan Semiconductor Manufacturing Corp (TSM) to reduce costs and improve capabilities to create a chip whose competitiveness rivals Intel Corp’s (INTC).

In its most recent quarter, AMD announced its sixth straight quarter of double-digit revenue growth. Growth was strong (93% year-over-year revenue growth) across its business segments and management expects revenue growth to come in at a whopping 50% for fiscal 2021. Furthermore, gross margins were up 100 basis points in the most recent quarter and management forecasts second quarter growth to be nearly as impressive with 86% year-over-year growth. (See Advanced Micro Devices stock charts on TipRanks)

While these numbers are certainly impressive, it should be noted that semiconductors are very cyclical and AMD’s primary competitor – INTC – is currently facing manufacturing challenges, which are potentially temporarily boosting demand for AMD’s products.

Valuation Metrics

In addition to the company’s remarkable growth momentum, its valuation appears quite reasonable. Its forward enterprise value to EBITDA is 32.72x compared to its historical average of 33.71x.

Wall Street’s Take

From Wall Street analysts, AMD earns a Moderate Buy analyst consensus based on 10 Buy ratings, 7 Hold ratings, and 1 Sell rating in the past 3 months. Additionally, the average Advanced Micro Devices price target of $107.50 puts the upside potential at 13.8%.

Summary and Conclusions

AMD is riding strong momentum from rapidly growing demand for its world-class technology. Furthermore, its main rival’s manufacturing challenges and AMD’s recent partnership with TSMC put it in an even stronger position for the near future. Additionally, its valuation remains fairly attractive, and Wall Street analysts are generally bullish on it as well.

That said, investors should retain a healthy dose of caution before going all-in on AMD. The semiconductor industry is highly cyclical, and AMD’s lower scale and heavy dependence on execution excellence in the face of a larger rival mean that its profitability can evaporate quickly. While AMD's strategic partnership with TSMC has helped even the odds in terms of scale, INTC still has greater resources that it can pour into research and development than AMD can. This could put AMD’s long-term competitive positioning at risk.

While AMD certainly has a lot going for it and looks like it could be an attractive buy at current prices, investors should still keep the significant risks and uncertainties in mind when making an investment decision.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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