Technology has become one of the best-performing sectors on Wall Street, driven by the growth of concepts like cloud computing, artificial intelligence and big data. Semiconductor companies, as measured by the iShares Semiconductor ETF (PHLX), have outperformed the overall technology industry and the S&P 500.
In this article, we take a look at Advanced Micro Devices (AMD), a company that has emerged from obscurity to challenge the industry’s big behemoths like Intel (INTC), Broadcom (AVGO), and Qualcomm (QCOM).
Before digging deeper to check out what analysts have to say about the AMD stock outlook for this year, we first recap the basics of this business, how it distinguishes itself from its key competitors and how the company’s stock has performed over the past few years.
What makes AMD a company of choice in 2020?
Advanced Micro Devices, a company that was struggling to survive only a few years ago, has now become the most richly-valued semiconductor business in the US. Posting a mind-boggling $1.2 billion loss in 2012, it found its way to profitability in FY’18 when it made a net income of $337 million.
This success is mostly attributed to Lisa Su, who became the CEO in 2014 and launched an aggressive restructuring strategy a year later. The strategy included laying off 5 per cent of the total workforce and outsourcing most of its manufacturing.
Part of her success as CEO has been her significant focus on research and development. The annual R&D spending has increased from less than a billion dollars in 2015 to more than $1.54 billion in 2018.
This spending has established AMD as a clear contender in the chip industry. It has taken market share from other bigger companies like Intel. According to Steam Powered, the company has increased its market share of computer processors from 16.5 per cent in September 2018 to 21.82 per cent this year. Meanwhile, Intel’s market share has declined from 83 per cent to 78.1 per cent.
Another study by Mercury Research offers a table of AMD’s market share growth compared to its key rival Intel.
We expect AMD to continue to take business from Intel, which is way behind in developing 7-nanometer chips. To put this into perspective, while Intel expects to launch its 7nm chips in 2021, AMD has already started shipping them. Meanwhile, Intel has seen major delays and roadblocks on the development of its 10-nanometer chips.
AMD’s success has also been reflected in its financial performance. In the most recent quarter, the company had a top-line growth of 50, which was the fastest growth among its peers. The firm attributed this growth to a combination of factors such as a strong macro environment and a high demand for 7nm Ryzen and EPYC processors. The latter point is clear evidence that its investments in R&D are bearing fruit.
Additionally, the company has achieved all those highs while still undergoing deleveraging. All in all, it has already reduced its total long-term debt from $1.16 billion in 2018 to just $486 million in the most recent quarter.
In total, AMD had a top-line growth of $6.7 billion in 2019. Most importantly, the company has started to grow its gross, EBITDA and operating margin. This is partly due to higher average selling prices (ASP) and the CEO’s decision to outsource some parts of manufacturing.
Advanced Micro Devices stock analysis
Let’s quickly revise how AMD stock has performed over the years. The chart and analysis below are adjusted for the two splits the company has made during this period.
AMD has witnessed high levels of volatility throughout its history as a publicly traded company. Its stock managed to surge in the early days when it was using the “virtual gorilla” strategy. At the time, it was fabricating chips manufactured by companies like IBM (IBM) and Motorola (MSI) in its bid to compete with Intel. However, the AMD share price then entered a period of downtrend, falling as low as $1.875 by 1990.
Its first major rally happened in the late 1990s, when the world has finally started to embrace technology at a rapid pace. At its peak during the dot com bubble, the company was valued at more than $13.60 billion. This was a significant leap for a firm that was valued at some $550 million only ten years earlier.
Once the bubble burst in the early 2000s, the business took a hard hit, with its stock collapsing dramatically. By 2002, its valuation declined to about $1.8 billion.
The period that followed was characterised by low interest rates and irrational exuberance. As a result, AMD stock started to gain an upside momentum again, right before crashing during the infamous financial crisis of 2008.
In the past decade, the AMD share price stagnated below $10 as the company began to post incredible losses. The situation has changed for the better after Lisa Su became CEO and started pushing radical changes to bring the business back to life.
AMD had a great 2019 as its shares outperformed the S&P 500 and Nasdaq Composite indices. Such a stellar performance was mostly due to the company's growing market share across its segment, the bullish sentiment from analysts and the management’s decision to hike guidance in most of its quarters. In total, AMD beat analysts’ estimates in all quarters except the third when it had a small miss.
This year, the stock has declined by about 13 per cent in reaction to the ongoing volatility associated with the coronavirus outbreak. Still, this decline is better than that of its closest peers like Intel and Nvidia. It is also better than that of the Semiconductor ETF (PHLX), which has already lost about 27 per cent.
Advanced Micro Devices stock forecast: what do analysts have to say?
In this section, we discuss an AMD stock forecast based on the current macroeconomic environment and its latest performance.
The fundamentals of the company are relatively sound. In the most recent quarter, its revenue rose by 50 per cent to about $2.13 billion. Such a boost was driven primarily by a strong performance of the computing and graphics segment, which rose by 69 per cent YoY.
Growth in this segment was possible due to the strong demand of its 7-nm processors. The business achieved this by launching its fastest Ryzen 3950X processor and the 24 and 32-core versions of Ryzen Threadripper. Meanwhile, its Enterprise, Embedded and Semi-Custom sectors grew by just 7 per cent in the quarter.
The chart below shows the quarterly growth of AMD's revenue.
Looking ahead, the company expects its revenue to stand at about $1.8 billion in the first quarter, representing a 42 per cent YoY growth. According to data from Yahoo Finance, analysts predict this figure to be around $1.79 billion, with the company generating $1.94 billion in revenue in the second quarter. However, these estimates could change because of the quarantine shutdowns in most cities in Europe, America and Asia.
The company faces a supply and demand problem this year. On supply, most of AMD's products are produced in Asia by companies like Taiwan Semiconductor, Micro-Star International and TUL Corporation. There is a possibility of disruption of supply chains, which could affect the business’s manufacturing and distribution.
We expect the demand for its products to soften as most companies are now reducing their IT spendings. Moreover, the growth among individual customers is also likely to decline as many potential buyers face mass layoffs. On a positive side, however, the demand has a potential to rise as more gamers stay at home due to quarantine.
Many experts believe that AMD will weather the storm well. According to Yahoo Finance, most analysts who cover the company are optimistic about its performance this year. In a recent note, analysts at Piper Sandler mentioned AMD as one of the five chip stocks to own in the next five years. In another report, analysts at Northland upgraded AMD, calling it a "company to own in a crisis".
Meanwhile, analysts at Bank of America (BAC) have taken a bearish stance, trimming their AMD stock price forecast from $62 to $58 citing recession fears.
Let’s take a look at some of the latest AMD stock predictions provided by analysts:
With AMD stock trading at around $39 per share, analysts at Craig Halium and Atlantic Securities are the most bullish since they expect the stock to jump by about 53 per cent.
Based on the information provided by Wallet Investor, an online forecasting service, the company’s stock is expected to end 2020 at $51.8. Looking ahead, AMD shares are prognosed to trade at $105 in March 2025. Therefore, if you decide to invest in it today, the revenue in five years is predicted to be around +152.19 per cent.
For now, an answer to “How high will AMD stock go?” mainly depends on a few key factors. Those include whether the company will continue its record of impressive revenue growth and whether it can manage its costs well. In addition, it depends on whether the business will take more market share from Intel and how it positions itself in the growing segments like cloud and 5G.
A technical perspective: will AMD stock rise in the foreseeable future?
In this part of Advanced Micro Devices stock forecast, we look at the technical aspects of the company's share price. As shown on the chart below, AMD stock has been falling since February 3, when it peaked at $59.11. Since then, the price has declined to a low of $36.68, which is along the 38.2 per cent line of the Fibonacci Retracement. As volatility in the market continues, we expect the stock to decline to the 50 per cent Fibonacci level of about $30. We then believe the price could resume its upward trend.
So, what is AMD stock: buy or sell?
AMD's team has managed to turn around a business that was suffering major losses just a few years ago. Through its investments in R&D and Intel's missteps, Advanced Micro Devices has become the fastest-growing chip company.
This has given it a premium valuation compared to its peers. For example, the company has a forward PE ratio of about 34. This is bigger than that of its counterparts like Intel, Micron (MU), and Nvidia, which have a forward PE of 9.63, 15.4, and 26.3. For that, the AMD share price forecast looks rather positive, with the stock declining in the short term only to recover and retest its previous highs in the long term.
However, just like any other investment, it can give no guarantee of financial success.
If you think you are not ready to make long-term investment commitments, but still want to try to profit from the price volatility, you can do so through contracts for difference (CFD) trading. Learn more about CFD trading with free online courses provided by Capital.com.
So, what are your bets on the AMD stock price prediction? Will the company’s shares overcome the looming financial crisis and skyrocket in 2020?
Make your own forecasts based on the latest AMD performance by checking out our comprehensive up-to-date chart.