The share price of Advanced Micro Devices Inc. (AMD, Financial) soared more than 11% on Monday on the news that it has won the business of Meta Platforms Inc. (FB, Financial), the company formerly known as Facebook. The chipmaker also announced new chips that aim to take on supercomputing players like Nvidia Corp. (NVDA, Financial).
On the heels of this encouraging news, AMD was the highest-gaining stock on the S&P 500 for the day, as shown below in GuruFocus’ S&P 500 Bubble Chart:
Under CEO Lisa Su, AMD has been on a mission to gain ground against competitors in multiple markets, and it has been successful in increasing its market share since 2017. The success of AMD’s strategy in recent years can be clearly seen from its three-year revenue per share growth rate of 13.6% and its three-year Ebitda per share growth rate of 71.6%.
However, even though the company has been gaining significant ground against the likes of Nvidia and Intel Corp. (INTC, Financial), its shares lag behind its historical median valuation metrics. The market typically assigns higher valuations to companies that outperform in terms of growth metrics, and if AMD is able to gain a dominant edge in multiple semiconductor markets, its multiples could explode.
Faster chips than Intel
After years of effort, it seemed that AMD managed to surpass the incumbent giant Intel Corp. (INTC, Financial) in the market for x86 processor chips in terms of certain metrics, with faster chips catapulting its market share to more than 25%, according to Mercury Research. It’s safe to say the Ryzen 5000 chips knocked Intel off its feet.
Even though AMD has been gaining on Intel, though, the two companies remain neck-and-neck in the minds of many consumers because there are advantages and drawbacks to both. Additionally, AMD’s chips didn’t have the top spot for long before Intel’s Alder Lake series seized it back with a new and impressive hybrid architecture.
Planning to change the game yet again, AMD plans to have its new CPUs with 3-D V-Cache heading to production later this year. Those chips are expected to bring up to 15% more gaming performance, which could leave Intel in the dust yet again.
Even though the two companies are playing tag in terms of who has the best CPUs, however, the fact that AMD has been gaining ground is impressive, as it represents a faster level of innovation. This is even more impressive when we consider that Intel has about 10 times the research and development budget of AMD.
Challenging Nvidia’s AI dominance
Nvidia is considered the unquestioned leader of the GPU market, with $24 billion in research and development spending throughout its history helping it keep its edge over competitors. It also has a booming artificial intelligence business, including an open AI car computing platform and the A100 chip, which it describes as an “AI supercomputer in a box.”
On Monday, AMD announced its plans to go beyond Intel in its search of rivals. Its new MI200 chip, which is an "accelerator" designed to speed up certain tasks like machine learning and artificial intelligence, is designed to compete with Nvidia's A100 chip. AMD also said that Oak Ridge National Laboratory in Tennessee will use the new chip in its "Frontier" supercomputing system.
A real competitor for Nvidia’s AI chips has the potential to be a huge deal. The AI market in the U.S. alone is expected to expand at a compound annual growth rate of 33.6% through 2028, rising to more than $360.36 billion. Even if AMD’s chips can’t reach the same level as Nvidia’s, they could still find their own niche in this explosive growth market through differentiation.
Growing partnerships
Another feather in AMD’s cap is that it has won Meta as data center chip customer, which marks a big win against Intel.
After securing Meta, AMD now has deals in place with many of Intel's largest customers. Adding in AMD’s deals with Alphabet (GOOG, Financial)(GOOGL, Financial), Amazon (AMZN, Financial) and Microsoft (MSFT, Financial), the company continues growing its impressive lineup of partnerships.
The AMD-Meta deal aims to “advance semiconductor ecosystem in the United States,” Su said in an interview with Yahoo Finance’s Brian Sozzi. Su further elaborated on how the deal with Meta connects to AMD’s growth strategy:
“Well, our goal is to really work with the largest hyperscalers in the world and give them the right performance, the right power, and really partner with them in terms of what they need in the data center. So we're very excited to announce that Meta is now using our processors in their data centers.
This has been something that we've worked on for several years. And again, this is a place where every hyperscaler has a different way that they're optimizing their data center based on the workloads that they're building and that they're using. And so this is what we're doing. We're working with these hyperscalers.”
Valuation
AMD is targeting impressive growth in markets that are expected to see astonishing growth in the coming years, and it is making every effort to deliver on its growth targets. After a few years of effort, the company is now neck-and-neck with Intel in terms of x86 processor capabilities, and it has now set its sights on Nvidia’s artificial intelligence market. It is also making efforts to up its cloud computing game as well.
Despite appearing poised for market-beating growth, AMD trades at a price-earnings ratio of 46.88, which is lower than its historical median of 60.96 and far below Nvidia’s 110.10 (though it is considerably higher than Intel’s 10.02).
According to the Peter Lynch chart, AMD is trading just barely below its median historical valuation (the historical median for the price-earnings ratio without non-recurring items is 44.5). Before today’s surge, it would have been considered undervalued based on the Peter Lynch chart.
Analysts are estimating that AMD’s revenue will grow approximately 31% over the next couple of years, which is a little higher than the expected growth of 28% for Nvidia’s revenue over the same period of time. Intel, meanwhile, is only projected to grow its top line by 2%, according to consensus estimates from Morningstar.
According to GuruFocus data, many gurus appear to believe AMD stock is worth buying. In recent quarters, more gurus have been buying the stock than selling it:
Gurus seem even more bullish on the stock when we look at trading volume instead of trade count:
Thus, in the years ahead, it seems reasonable to expect that as long as AMD can keep up with the kind of growth it is aiming for, it could trade with a valuation more in line with Nvidia’s rather than Intel’s. That doesn’t change the fact that shares are expensive currently, but the situation can change fast for growth stocks in a growing market. It all depends on whether or not the company can deliver and draw a higher price from investors.
