Advanced Micro Devices (AMD, Financial) has had a roaring 2016, with the stock zooming past 328% return in one year and 165% return on a year-to-date basis. Due to the chipmaker posting solid first and second quarter results, the stock has been on an upward trend since March this year and it looks like there is a bit more steam to pull ahead. Let’s take a closer look at AMD from a valuation perspective.
Generally, companies get a horrible valuation when the market thinks that the possibility for growth is very minimal. Just like Gilead (GILD, Financial) in the pharma sector, AMD’s valuation has been under pressure for a while because the company has been losing money since 2012, as revenue shrank sharply. With NVIDIA (NVDA, Financial) running away with the gaming market and steadily building up its position in the datacenter market as well, AMD’s fight for market share became as good as a fight for survival.
Despite being in that position, AMD posted a 9% sales growth during the second quarter, reaching $1.027 billion in sales compared to $942 million the company posted last year. Though the overall sales figures for the first six months - $1,859 million - was $113 million less than what the company made last year, AMD expects to post positive revenue growth for the current year, which means the company expects sales to accelerate during the second half of the year.
This is the primary reason why the stock has shot up so much in such a short period of time, but despite the above-300% rise in the last one, the year AMD’s current market capitalization is a mere $6.1 billion. AMD’s total sales during the last four quarters were $3.878 billion, which means, despite the roaring rise in stock price, AMD is still trading at 1.57 times its sales.
AMD’s potential markets are ripe for growth. There is plenty of action happening due to the growth of the cloud industry and AMD can get a significant share of the datacenter/server market while keeping gaming-based revenues at a steady level.
So, even though the competition has been running away with a lot of the market growth, there still seems to be plenty of room for AMD to co-exist and even grow.
Three-Year Vision - Can AMD really do this?
AMD’s focus areas are indeed some of the best ones it could have chosen.
The gaming and virtual/augmented reality segments are both solid investments. Gaming is a stable revenue stream and VR is growing faster than ever. With the computing segment comes the benefit of piggybacking on cloud and datacenter growth. And when you add the Internet of Things and embedded systems to the mix, it sets up AMD for some serious growth over the next several years.
From a pricing standpoint the company is still trading at rock bottom prices as investor sentiment has been bearish as the company kept bleeding money for a long time.
The Real Question is: Can AMD execute its ambitious three-year plan?
The outlook for the rest of the year is positive and the stock can go even higher, but the key problem is AMD is still way behind NVIDIA in the gaming and computing markets.
If AMD can get anywhere close to NVIDIA’s performance, its stock could skyrocket. But such a performance will entirely depend on AMD’s research and development team, which has been found wanting in the face of fierce competition.
It is an extremely risky stock to bet on and that is why the reward will be high if AMD can get its act together in the next three years.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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