AMD stock outlook: will it be able to maintain its growth pace?

Advanced Micro Devices Inc. (AMD) is one of the leading developers of computer processors and associated technologies for individual and business customers around the world. The Santa Clara, California-based company has a wide range of products and services such as processors, GPUs, and graphic cards for computing devices, as well as customized servers, and chipsets for enterprises. It also offers the technology for gaming consoles.

AMD vs NVIDIA

AMD has been competing in the GPU market with NVIDIA and the rivalry between the two is getting fierce over time. NVIDIA has been dominating the graphic cards market, though it is now facing tough competition from AMD, which has recently rolled out RX 6000 graphic chip series that is expected to give NVIDIA a run for its money.

Though NVIDIA has also launched its new graphic chips based on the latest Ampere architecture, AMD is expected to give it a tough time with its latest graphic cards series that is based on the RDNA2 architecture, offering a 54 percent performance boost as compared to the existing RDNA chips.

AMD is now looking to capture more share in the high-end GPU market, which NVIDIA has been ruling for many years. The company’s flagship RX 6900 XT pretty much resembles NVIDIA’s RTX 3090 in terms of performance. But when it comes to price, RTX 3090 comparatively carries a higher price tag than the RX 6800.

AMD claims that its new graphic chip series performs better while running the first-person shooter video game Doom Eternal at the highest graphic settings. The company said it has tested several titles such as Call of Duty: Modern Warfare and Forza Horizon 4 on devices incorporating its latest graphic chips and found that they either closely match NVIDIA’s chips in performance, or better than them, subject to the settings.

However, the claims are based on the tests conducted by AMD, and the results certainly do not reflect the victory of the company over NVIDIA in the graphics chip market.

5G Plans

AMD last month decided to acquire Xilinx in a transaction valued at $35 billion, as a part of its overall strategy to strengthen its product range related to 5G wireless communications. The acquisition is also expected to help the company boost its component revenue in the data centers market.

The deal, expected to close sometime next year, marks one of the most valuable acquisitions in the history of the chip market and came just a few weeks after Nvidia decided to acquire U.K-based chip developer Arm for a hefty amount of $40 billion.

The recent consolidation spree in the semiconductor industry was encouraged by several factors such as overlapping products and increasing operating costs. AMD expects the addition to expand its business, boost earnings, and help it to become a leading service provider for big tech companies around the world.

Xilinx is engaged in manufacturing a chip suite that can be customized for a range of tasks. For instance, they can be used by telecom operators in cellular base stations, which are about to get updated for the new 5G network.  

Financial Performance of AMD

AMD last month announced its financial results for the third quarter. It posted record revenue of $2.80 billion, representing a rise of 56 percent on a year-over-year basis. The strong surge in revenue was mainly driven by higher demand across all its segments.

Operating profit came in at $449 million, well above $186 million in the comparable period last year. The strong income numbers were partly helped by an increase in sales of Ryzen and EPYC chips, as well as semi-custom product sales.

AMD’s net income rose to $390 million in the third quarter, as compared to $120 million in the year-ago quarter. Gross margins rose to 44 percent, slightly up than 43 percent in the same period last year.

Speaking on the results, the company’s CEO Dr. Lisa Su said “we reported our fourth straight quarter with greater than 25 percent year-over-year revenue growth, highlighting our significant customer momentum. We are well-positioned to continue delivering best-in-class growth as we further extend our leadership product portfolio with the launches of our next-generation Ryzen, Radeon, and EPYC processors.”

If we analyze the sales performance of AMD’s segments, revenue at its computing and graphics unit jumped to $1.67 billion. This translates to a surge of 31 percent on a year-over-year basis, and 22 percent as compared to the prior quarter. On the other hand, revenue at the enterprise, embedded, and semi-custom unit came in at $1.13 billion, up 116 percent from the comparable period last year.  

Fourth-Quarter Outlook

AMD expects revenue of around $3 billion for the fourth quarter. The guidance translates to a surge of about 41 percent from the same quarter of 2019 and nearly 7 percent from the third quarter. The company is counting on its latest Ryzen and EPYC chips to drive the sales in the current quarter. Moreover, the non-GAAP gross margin is expected to be around 45 percent in Q4.

Analysts Coverage

Overall, 31 analysts have been keeping an eye on AMD stock price. The average price target forecast for the stock is $93 per share, with a high range of $120 per share and a low range of $13 per share. The mean price target of $93 represents a premium of about 10 percent from the stock’s closing price in the previous trading session. When it comes to recommendations, 36 analysts have a “Buy” ratings on AMD stock.

Recent Stock Performance

AMD has performed quite well so far in 2020 mainly due to tremendous growth across its different business categories. The stock was trading around $50 per share in January, before declining to a low price of around $38 in March, mainly due to the Covid-19 outbreak. The stock managed to regain its lost value afterward and rose to a new high of around $92 in September. Overall, AMD share price has increased more than 84 percent on a year-to-date basis, about +52 percent during the past 6 months, and about +4 percent over the last 3 months.