Advanced Micro Devices Inc. (AMD, Financial) received a boost this week after being upgraded by North American investment firm, Northland Securities. According to analyst Gus Richard, the Santa Clara, California-based semiconductor company will be spurred on by its end users' integration of artificial intelligence, which could see its stock reach $150 per share.
Although Richard makes a few valid points, an in-depth analysis is required to determine whether his $150 price target is justified.
Operational review
First, it must be recognized that Advanced Micro Devices' exposure to the growing AI arena is nothing new. Sure, the company will receive an additional boost from ChatGPT-esque technology; however, AMD has served artificial intelligence development for decades as a market-leading semiconductor producer. As such, the Northland analyst's statements about AI as a catalyst are likely overplayed.
Nevertheless, the fact the company is on a solid long-term trajectory cannot be ignored.
AMD surprised investors once again when it released its first-quarter financial results in early May, revealing $5.35 billion in revenue and adjusted diluted earnings per share of 60 cents. Although bothered by systemically-driven inflation and lower demand from enterprise customers, the company still managed to sustain a GAAP gross profit margin of 44% and non-GAAP operating income of $1.1 billion.
During the three months ended March 31, the company realized significant growth within its embedded segment as the Ryzen Embedded 5000 Series and AMD EPYC Embedded 9004 Series processors experienced robust demand amid scaling within the firewall, while storage solutions remained in high demand.
Although results from Advanced Micro Devices' client, gaming and data center segments all curtailed during its latest operating quarter, the causes were primarily systemic and unrelated to structural concerns. In fact, a robust long-term sales trend is anticipated across all of AMD's segments as the company leads the GPU market, which is projected to grow by 21.3% per year until 2030. This indicates AMD is due to deliver promising long-term results.
Source: Advanced Micro Devices
As featured in a recent press release, AMD Chief Financial Officer Jean Hu suggested the company is set for a robust second quarter.
"For the second quarter, we expect sequential growth in our Data Center and Client segments offset by modest declines in our Gaming and Embedded segments," she said. "We remain confident in our growth in the second half of the year as the PC and server markets strengthen and our new products ramp."
Hu's comments can be supported by looking at the salient features of today's economy. First, inflation has started tapering, leading to higher consumer sentiment in recent months. On top of that, material costs are much lower than earlier this year, lending AMD the necessary latitude to bolster its income statement.
Source: Trading Economics
In essence, Advanced Micro Devices' operations continue to show structural prowess. Although systemic headwinds curtailed its first-quarter operating margins, the company remains best in class. In addition, a potential economic turnaround might jolt its full-year results.
Valuation and technical analysis
Advanced Micro Devices' valuation metrics paint a puzzling picture. One one hand, the stock trades around 503 times its earnings, which is worse than 98% of its sector peers.
On the other hand, GuruFocus' discounted cash flow model shows AMD's stock is fairly valued with a price target in line with its traded price. Therefore, the juxtaposition suggests that the stock's trajectory is indeterminate.
Unlike its valuation figures, Advanced Micro Devices' technical data paints a more bullish picture. Although the stock's more than 80% year-to-date surge has resulted in it trading above its 12-month moving average, the relative strength index figures remain below 70, implying the stock still has room to run.
Based on these factors, Advanced Micro Devices appears to have little fundamental value after its year-to-date surge. However, technical analysis implies the opposite. As such, a consensus about the stock's trajectory depends on the methodological preference of the individual investor.
Wall Street's take
Although they should not be looked at in isolation, guru trades provide an indication of a stock's prospects as well.
The latest 13F filings for the first quarter show AMD was a net buy. The likes of Catherine Wood (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio) all delved into the stock, suggesting that a uniform outlook on the stock exists on Wall Street.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Final word
AMD's prospects are bright, given its continuous advancements in AI. Moreover, recovering consumer sentiment could coalesce with the GPU industry's long-term growth rate to send the company's earnings even higher.
Although AMD's current valuation metrics imply its stock is fairly priced, its longer-term prospects remain intact.
