Off Nearly 20% Since its Post-Earnings Peak, This Stock is a Buy

Advanced Micro Devices, Inc. (NASDAQ:AMD) earned a quick boost late last month after the chipmaker reported its second-quarter results.

It also turned out to be a temporary boost.

AMD stock has plunged by about 18% since peaking on July 26, trimming its year-to-date gains to just 12%.

It certainly didn’t help that the analyst community piled on.

For example, Goldman Sachs’ Toshiya Hari believes AMD shares are overvalued, and his price target of $10.60 implies another 16% worth of downside. In the report, Hari writes:

“However, Street EPS estimates are likely to remain largely unchanged, in our view, given increasing opex (low DD yoy growth for four consecutive quarters – incl. CQ3) and a step-function change in diluted share count (3Q guide: +10% qoq from 1,036mn in 2Q).”

Citigroup’s Christopher Danely also took a swing at AMD stock, noting that the “Ethereum (a cryptocurrency) mining related GPU gold rush is over.” His price target is an awful $5!

These analysts definitely have sound arguments, but I still believe the bull case for Advanced Micro Devices is intact. And I believe shares are poised for a nice growth spurt for the next couple years.

Here are three reasons why.

Top-Flight Leadership

When Lisa Su came on board as Advanced Micro’s CEO in late 2014 — following two years at AMD, as well as stints at Freescale Semiconductor, International Business Machines Corp. (NYSE:IBM) and Texas Instruments Incorporated (NASDAQ:TXN) — Wall Street essentially yawned. The move looked like career suicide considering AMD’s long history of strategic blunders and seemed to be on the verge of oblivion.

But Su proved to be an outstanding leader who was more than up to the task. She swiftly cut costs, outsourced chip production and focused on product innovation.

Su’s background proved vital to the job. While she held executive positions at Freescale and IBM, she also is a skilled engineer with bachelor’s, master’s and doctorate degrees in electrical engineering from MIT, and she has authored more than 40 technical papers.

In other words, in Su, AMD stock holders got someone who could get her hands dirty.

Multiple Catalysts

At $12 billion in market capitalization, Advanced Micro Devices is a relatively small company compared to giants like $100 billion Nvidia Corporation (NASDAQ:NVDA) and $170 billion Intel Corporation (NASDAQ:INTC). Nonetheless, AMD has proven efficient in developing a multitude of product offerings.

There’s the Ryzen 3 processor — a key driver for AMD’s 51% spike in Computer and Graphics revenues last quarter. This momentum is expected to continue, especially amid what should be strong back-to-school and holiday seasons.

But other chips should pump up the growth, including …

  • Radeon Vega GPU: This technology powers high-end graphics for professional workstations. Apple Inc. (NASDAQ:AAPL) has already agreed to use the chip for its iMacs, saying in its press release that “Radeon Pro 500 series graphics enable extraordinary computing experiences, including stunning gaming, immersive VR on select models, and fluid content creation with exceptional performance and support for GPU acceleration across a range of creative applications on the Mac platform, such as Adobe Premiere Pro, After Effects, and Photoshop and the Foundry Nuke, Mari and Modo.”
  • Epyc: This recent offering is focused on the lucrative datacenter market currently dominated by Intel. As a testament to the technology, AMD already has signed customers like Hewlett Packard Enterprise Co (NYSE:HPE), Dell, Microsoft Corporation (NASDAQ:MSFT) and Baidu Inc (ADR) (NASDAQ:BIDU).

Secular Trends Benefit AMD Stock

Advanced Micro Devices is targeting some of the most important trends in technology.

There is, for example, the market for gaming. According to research from PricewaterhouseCoopers (PwC), spending is expected to grow at a compound annual rate of 6.3% through 2021, hitting roughly $28.5 billion at that point.

Virtual reality is likely to be a big driver, too, with PWC forecasting staggering 64% annual growth through 2021, when it’s expected to reach about $5 billion. This is great news for AMD, whose chips are geared for VR.

But perhaps the biggest market opportunity for AMD stock is the datacenter, which sits at about $16 billion per year. Customers want an alternative to INTC — not just in pricing, but the features front. And Epyc delivers.

“With the strong global ecosystem and customer interest we have built around our EPYC processor family, we are on track to reenter the datacenter market in a major way,” Su said on AMD’s recent earnings call.

— Tom Taulli

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Source: Investor Place