Advanced Micro Devices Inc. (NASDAQ: AMD) is on a roll. The 40-year-old company is nearing the top of its 52-week range. It hit an all-time high of around $59 in April and was trading at around $52 late Friday, giving it a market cap of almost $62 billion.
The stock is up nearly 18% year to date, beating the Dow Jones industrial average, which is down about 11% for the same period. AMD stock’s one-year return is an impressive 78%.
The stock has been lifted by a steady flow of product announcements. Earlier this week, AMD said two of its second-generation EPYC processors will be included in Nvidia Corp.’s (NASDAQ: NVDA) recently announced third-generation Nvidia DGX A100 artificial intelligence (AI) system.
Nvidia will market its new AI capabilities hard, and for each system the company sells, AMD will get a cut. Nvidia’s DGX A100 system carries a base list price of $199,000. While AMD’s margins on one of these systems may not reach 46%, its expenses for selling them should be reasonably low.
The market reacted favorably to the partnership, sending AMD stock higher earlier this week.
Fresh rumors were also out this week about Microsoft’s new Surface hardware. The Surface Laptop 4 is a highly anticipated launch expected some time later this year, perhaps in October.
Last year’s Surface Laptop 3 was positively received. That device was sold with both AMD and Intel chip options. AMD machines were cheaper and targeted the consumer market while the Intel models targeted businesses.
Leaks in the trade press suggest the Surface Laptop 4 and/or a new Surface tablet will use AMD’s Ryzen processors.
While Apple is expected to drop Intel chips from some of its PCs, at least one analyst sees a potential play for AMD. In a recent blog post, Zacks Equity Research noted that AMD has been challenging Intel on the performance front. That could make Apple consider AMD chips for its Mac line.
Video Game and Cloud Growth
The COVID-19 pandemic has fueled the video game industry, since players have had more time to play. Santa Clara, California-based AMD remains a major force in this space.
Set to debut for the holiday shopping season, the Sony PlayStation 5 and Microsoft Xbox Series X both will contain customized AMD chips. “It’s an exclusive relationship with Sony and Microsoft, and that is something that we can count on for many, many years to come,” said AMD Chief Financial Officer Devinder Kumar, at a recent conference.
The cloud is another beneficiary of the stay-at-home phenomenon. Data centers have seen increased demand, leading to more chip orders, and AMD has been fighting for market share in this space.
AMD is currently trading above the stock’s 12-month average price target, $51.97. But stock market analysts lately have been boosting their targets, as many think AMD is undervalued.
Recent boosts include Loop Capital (from $54 to $60), Argus (from $60 to $66), Cfra (from $53 to $60), and Northland Securities (from $52.50 to $67.50). Rosenblatt Securities has set the highest target, $70.
Last week, Bank of America reiterated its Buy ranking. Overall, the Buy ratings outnumber the Holds, 19 to 14. Only one analyst has labeled AMD a Sell.
Everyone will be watching the next earnings report to see how the depressed economy has impacted sales for AMD. For the first quarter, AMD said that it had $0.14 in earnings per share (EPS) and $1.79 billion in revenue. Analysts were expecting $0.18 in EPS and $1.78 billion in revenue. The same period of last year had $0.01 in EPS and $1.27 billion in revenue.
Revenue increased 40% year over year, primarily driven by higher Computing and Graphics segment revenue. However, revenue was down 16% on a quarter-over-quarter basis due to declines in both segments.
In announcing its earnings in April, the company struck a cautious note about the rest of the year. Executives were fearful that PC and laptop sales would be hit hard by the coronavirus.
But analysts have seen some encouraging signs from AMD’s suppliers, including Taiwan Semiconductor. Monthly sales increased in April, year over year, indicating that the demand is there.
U.S.-China trade relations are another evolving risk for AMD, which sells a lot of chips in China. The topic has taken a back seat because of the coronavirus and racial equality protests.
But the real conflict between the two trade powerhouses hasn’t gone away. As the U.S. election approaches, China could become a punching bag on the campaign trail. Chip makers could take a hit, due to tariffs or a Chinese shift toward producing their own chips.