Advanced Micro Devices (AMD) is up almost 100% this year despite the pandemic-induced recession. The stay-at-home trend has led to increased home computing and gaming, which has driven up AMD’s revenue and stock price. The stock even soared 23% last month after the chipmaker reported robust third-quarter results and announced a massive acquisition in October.

AMD reported earnings on October 27, where net income jumped 148% to $390 million, or $0.32 per share. Revenue soared 56% year over year to $2.8 billion. These gains were driven by strong sales in the company’s Ryzen and Radeon processors. In fact, AMD had 31% growth in its computing and graphics segment, which make up nearly 60% of its total revenue. The pandemic created strong demand for chips needed in PCs, gaming, and data center products.

On the same day, AMD announced it was acquiring semiconductor maker Xilinx (XLNX) for $35 billion. XLNX is the leader in adaptive and intelligent computing. Its chips are critical in the performance of various devices in the communications, data processing, industrial, consumer, and automotive markets. The merger should expand AMD’s product portfolio into adaptive computing solutions. This would create a $110 billion addressable market for the company.

Thesis for Buying

The company has also been gaining market share from chip giant Intel (INTC). INTC had been a leader in semiconductors for over 50 years, but its technology has recently fallen behind. The company has delayed its recent chips and is even exploring outsourcing manufacturing to Taiwan Semiconductor (TSM).

This has provided an opening for AMD to gain market share, especially in gaming. Its chips are not only featured in desktop and laptop PCs, but in data centers and the recent Sony (SNE) PlayStation and Microsoft (MSFT) Xbox.

Another growth driver for the company that has come into play is cryptocurrency. A few years ago, when Bitcoin and other cryptocurrencies were flying high, many crypto-miners were purchasing graphics cards from the company, which also drove up prices due to a shortage of GPUs. History seems to be repeating itself as cryptocurrencies have rallied recently. This is likely to increase the demand for graphics cards from miners.

The Numbers

AMD has a three-year revenue growth average of 20.3%. Sales are expected to grow by 25.4% next year. Earnings are expected to grow 48.8% next year and at an average of 44.7% over the next five years. The company has a healthy balance sheet with $1.7 billion in cash, up from $1.2 billion in the same period last year.

Long-term debt is only $578 million, and its current ratio is 2.3, indicating it has enough capital to cover short-term obligations. AMD also has a strong return on equity of 22.7% and an ROIC of 23.9%, indicating the company is highly profitable.

The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “B” for Peer Grade. These are the components that make up the POWR Ratings. The stock is also ranked #6 in the Semiconductor & Wireless Chip industry.

The Verdict

From a fundamental standpoint, I think the stock is a “Buy” due to the expectation for significant market share gains on the CPU data center market and its next-generation EPYC processor. AMD should see higher margins as these processors will generate higher volume and command higher prices. The stock has a trailing P/E of 127.12 and a forward P/E of 53.48, so it might make sense to buy on the dips.

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AMD shares fell $0.16 (-0.17%) in after-hours trading Thursday. Year-to-date, AMD has gained 99.87%, versus a 15.58% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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