Advanced Micro Devices’ (AMD) relentless march forward has resulted in outsized market gains for five consecutive years. No matter the macro climate and attendant headwinds, the stock just keeps performing. 2020 has been no different, although by AMD standards, relatively muted compared to recent years. Still, shares have appreciated by 19% year-to-date.
But the upward movement must come to an end at some point, right? Maybe, but not anytime soon, according to RBC analyst Mitch Steves. In a recent report to clients, the 5-star analyst dissects why AMD’s gaming console segment is set to act as a catalyst over the next two-three years.
With Sony and Microsoft both lining up holiday season launches for the PS5 and the Xbox, as the provider of much of the technology that powers the game consoles, AMD will benefit when both release their products.
“Considering that build patterns for both the Xbox and PS5 are already set, we think AMD has high revenue visibility for the back half of 2020 and foresee higher than expected margins for the console segment,” Steves noted.
In the previous gaming cycle, Steves estimates peak revenue amounted to $700 million for one quarter, with the “initial ramp” bringing in roughly $525 million.
“With AMD's current guidance we estimate that semi-custom revenue should reach ~$660 million in the initial launch,” added Steves.
That is a 25% premium on the last round’s launch. Based on the assumption units will be up by 10%, Steves reckons it would imply the ASP (average selling price) will increase by approximately 14%. Add to that Steves’ revenue estimate of $660 million per quarter, and semi-custom’s 2% operating margin uptick could result in a 3% addition to AMD's total EPS.
No surprise, then, to learn Steves keeps an Outperform rating on AMD, along with a $66 price target. What’s in it for investors? Upside potential of 21%. (To watch Steves’ track record, click here)
The Street has a cautiously optimistic outlook on the high-flying chipmaker. Based on 13 Buys and 9 Holds, the analyst consensus rates AMD a Moderate Buy. The average price target hits $56.53, and implies possible gains of 3% over the coming months. (See AMD stock-price forecast on TipRanks)
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