AMD Stock Looks Set For A Rally: Advanced Micro Devices, Inc.

Advanced Micro Devices, Inc. stock looks set for a rally: EPYC expands into China, Ryzen gains market share even as Vega is off to a flyer.

As EPYC Gains Ground, AMD Stock Should Edge Higher
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Shareholders of Sunnyvale, California based AMD (NASDAQ:AMD) seem to have largely ignored the strong quarter the company recently reported. AMD stock price closed the last trading session at a price of $12.48 a share, 11.6% lower than the closing price on July 25, the day of the latest earnings release. As we had covered in our post-earnings review, AMD reported a solid quarter, beating Wall Street estimates while also guiding ahead of expectations. However, the stock price movement hasn't been as encouraging. The question here is: Has this drop in AMD stock opened up an opportunity for AMD bulls? Can AMD stock rally from here? More so, given the way EPYC and Vega are gaining ground.

EPYC Gains Ground In China

As we have stated multiple times in the past, AMD has been nearly absent from the server processor market, with rival Intel (NASDAQ:INTC) holding a monopolistic 99% share. With EPYC, AMD aims to correct this. What's noteworthy is that any revenue from this segment will effectively be incremental dollars for the Dr. Lisa Su led company, which will boost the top line/earnings growth for the firm. Even a 10% share of the server market could mean nearly $4.5 billion in additional revenue, which is huge in context of the $4.3 billion revenue AMD generated in FY 2016.

Having got the support of most major cloud service providers at launch, AMD recently announced new partnerships for its EPYC processors, which should help the company gain a firm footing in the cloud market in China. Quoting Forrest Norrod, senior vice president and general manager, Enterprise, Embedded and Semi-Custom products, AMD, "Today we celebrate the AMD EPYC family of CPUs for the datacenter market in China and are excited to announce support from the leading cloud service providers, Tencent and JD.com, while continuing momentum from Baidu, Lenovo and Sugon." Norrod went on to add that "By partnering with these market leaders, AMD is bringing choice and competition to one of the fastest growing technology markets in the world."

According to the international trade administration, the cloud computing market in China is expected to be a $20 billion market in 2020, a more than 10-fold increase from $1.5 billion in 2013. In percentage terms, these numbers imply an average annual growth of nearly 45% through the 7 year period. The recent EPYC partnerships in China should help AMD leverage the tailwinds of a rapidly growing market.

Not only are things looking bright on the server side of the processor market, if recent commentary is anything to go by, AMD is gaining ground in the PC processor market as well. Bank Of America analyst Vivek Arya recently outlined a scenario where he sees AMD stock gaining 40% driven by 30%-50% shelf space AMD's Ryzen chips are currently occupying at major e-tailers.

AMD Vega GPUs are off to a flyer

AMD is also enjoying success on the GPU side of its business. AMD Vega is off to a strong start, with the GPUs receiving positive initial reviews. The demand for the products has been so strong that the prices on most e-tailers have spiked by $100 forcing many buyers to cry foul, kicking up the 'Vega pricing scandal' in the process. While AMD has now addressed the concerns, the company will not be able to do much in terms of suggesting prices to retailers. Enforcing retailer MSRPs could be illegal, as pointed out by Usman Pirzada of wccftech. AMD has come out with a solution of sorts, offering manufacturer rebates to e-tailers, which could help bring down prices at some partner retailers. However, a manufacturer rebate might not be a definite solution. As Usman notes, "AMD can offer them a manufacturers rebate to bring down the selling price for the consumer but if the margin they are earning is greater than the rebate offered, then even that at times will not work."

While the market has been quickly buying out the available stocks of the Vega GPUs, the pricing fiasco isn't entirely a function of demand alone. The Vega GPU stocks ran into logistical issues, which meant that only a fraction of the supply actually reached the e-tailers in time for the launch. However, this should be sorted soon. According to wccftech sources, "the entire stock should be up for grabs within this week" which should restore the demand/supply balance. Given the positive initial reviews, the restoration of the supply should help the company sell more units of these products, which will have a direct impact on revenue through the coming quarters.

AMD Stock Is Trading Below The Consensus Analyst Price Target

The markets failure to acknowledge the strong Q2 results and the negative sentiment from the Vega controversy seem to have opened up an opportunity to go long AMD stock. Wall Street analysts currently have a consensus price target of $14.23 on the stock, which represents a 14% upside to the last closing price. It's not often that AMD stock trades at such a discount to the Street's estimates. All in all, AMD stock looks set for a strong rally.

AMD stock price vs target price

To sum up, AMD is firing on all cylinders with its server processor (EPYC) business, PC processor (Ryzen) business as well as GPU business gaining momentum. As BofML analyst Vivek Arya wrote in a recent note to clients, "AMD has momentum which should gradually translate to share gains." And with the short interest in the stock near one-year highs, an upward move could force a short squeeze, which will add more fuel to any rally in AMD stock price. Hence, long term investors looking to buy into one of the hottest semiconductor plays in the market should consider buying AMD stock at current price levels.

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Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

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