Shares of Advanced Micro Devices Inc. (AMD, Financial) have yet to hit a speed bump as they continue their rally. The stock is up over 170% so far this year and soared 11% on Tuesday, touching a 12-year high, as a result of a string of positive analyst upgrades.
The primary reason for the northward march was the upgrade from analysts at Cowen and Jefferies, who raised their price target for Advanced Micro to $30 and reiterated the buy rating. While there were multiple reasons for the upgrade, the driving factor was the analysts believe the company is better positioned to tackle consumer demand than its long-time rival, Intel Corp. (INTC, Financial).
Advanced Micro is providing top-notch products at rather competitive prices. As the upcoming player in the chip industry, the company is stealing away market share from Intel as the latter struggles to cope with the manufacturing process for its 10-nanometer chips. Moreover, Intel also reported a security vulnerability with its chips last month, adding to concerns.
In addition, Advanced Micro plans to release 7-nanometer chips in 2019. This is expected to weigh on Intel’s top line. Investors should note that smaller chips are often more powerful than their larger counterparts.Â
Advanced Micro’s shares have been a top performer in the S&P 500 so far this year, which has encouraged investors. Considering the market opportunity and the company’s current size, there still seems to be immense potential in the stock. Moreover, the company reported extremely strong revenues in the second quarter. The top line grew 44% year over year to $1.76 billion, above the $1.72 billion predicted by analysts.
In regard to valuation, while Advanced Micro currently floats a forward price-earnings ratio of 46.73, the market scope supports a bull case. The company's current market cap of nearly $28 billion is not even 10% of Nvidia (NVDA, Financial) and Intel’s market cap combined. Moreover, the company has an operating margin of 7.37%, compared to the industry median of 6.76%, and a return on equity of 52.36%, compared to the industry median of 7.07%.
Advanced Micro Devices is scheduled to report its third-quarter earnings in late October. While quarterly numbers are expected to decline slightly, annual numbers are expected to be quite impressive. The company has posted profits in each of the last four quarters and reported its highest quarterly revenue in almost a decade.
Moreover, while micro-level factors specific to the company are also playing in the stock’s favor, the primary drivers are expected to be deficiencies in the competition. As Advanced Micro’s competitors experience issues with their product launches and innovation, it is leveraging the opportunity to capture a higher piece of the market.
Disclosure: I do not own any of the stocks mentioned.
