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Bull of the Day: Advanced Micro Devices (AMD)

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I've been telling everyone I know about one sure-thing trade all year: buying Advanced Micro Devices (AMD - Free Report) between $75 and $80. My conviction was so strong on this idea because I was closely watching everything competitor NVIDIA (NVDA - Free Report) was doing and it seemed to me that AMD was doing a lot of the same things just as well, and yet the shares were trading at a significant discount to its bigger peer.

I became convinced about buying AMD pullbacks a year ago in July after the stock broke-out strongly from a consolidation around $55. The catalyst was another advance in the PC wars against rival Intel (INTC - Free Report) . I covered that in this article and video...

Release the Ryzen! AMD Roars in the Nanometer Wars

I also expanded my knowledge of how the little gaming chip company had undergone an "advanced" semiconductor revolution in the past six years under the leadership of Taiwan-born engineer Lisa Su. Early in her career, Su worked at Texas Instruments, IBM, and Freescale Semiconductor in engineering and management positions.

As an industry outsider -- and semiconductors is a complex industry involving microscopic physics -- I was focused on how NVIDIA and fellow Taiwan engineer Jen-Hsun "Jensen" Huang had turned the gaming GPU chip (graphics processing unit) into the foundations of machine learning and artificial intelligence (AI).

So when I learned that Lisa Su was basically doing the same things, but with her own brands of excellence, I was hooked to learn more. And coming up, I'll show you good comparisons of these two Taiwanese chip ninjas and what their teams of excellent engineers are able to create with the "massively parallel architectures" of GPUs.

AMD Surges From $80 to $105 Since June 17

I hope you were listening in March when I explained how I got my son and his wife to buy AMD at $75 with a resting limit order. I covered that in Flush Draw: How to Beat the Algos When They Run the Stops.

You even got a bunch more chances to buy AMD shares near $73 in the middle of May. I think part of the pessimism was over the company's planned $35 billion acquisition of Xilinx and whether or not regulators would approve it. The all-stock deal for the FPGA chip maker was announced in late October and on April 7, both boards approved the deal, describing the marriage thus in the press release...

The acquisition will bring together two industry leaders with complementary product portfolios and customers, combining CPUs, GPUs, FPGAs, Adaptive SoCs and deep software expertise to enable leadership in computing platforms for cloud, edge and end devices. Together, the combined company will have the ability to capitalize on opportunities spanning some of the industry’s most important growth segments, including data centers, gaming, PCs, communications, automotive, industrial, aerospace and defense.

Well, the mood started to improve in the middle of June, even before UK and European regulators gave the deal their thumbs up. It began with a 5.5% pop in AMD shares on June 17 after the Lisa Su juggernaut announced that Alphabet (GOOGL - Free Report) unit Google Cloud had selected AMD EPYC processors to power its new datacenters.

And despite deteriorating economic and market relations with China -- which could lead one to believe that the last regulator to approve the AMD-XLNX deal might get stingy -- shares of AMD have marched to all-time highs above $100 this week.

Lisa & Co. Deliver the Goods

The catalyst for this week's double-digit rally from $92 was another stellar beat-and-raise quarter. AMD reported second-quarter 2021 non-GAAP earnings of 63 cents per share, which surpassed the Zacks Consensus Estimate by 16.7%. The bottom line soared 250% year-over-year and 21% sequentially.

Revenues of $3.85 billion outpaced the Zacks Consensus Estimate by 6.4% and surged 99% y-o-y. On a sequential basis, the top line increased 12%.

Robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments drove the improvements.

"Our business performed exceptionally well in the second quarter as revenue and operating margin doubled and profitability more than tripled year-over-year," said AMD president and CEO Lisa Su. "We are growing significantly faster than the market with strong demand across all of our businesses. We now expect our 2021 annual revenue to grow by approximately 60 percent year-over-year driven by strong execution and increased customer preference for our leadership products."

That full-year revenue projection comes after the prior forecast of +50%.

Top-Line Growth Details

Computing and Graphics segment revenues of $2.25 billion increased 65% y-o-y and 7% sequentially. The upside can be attributed to higher revenues from client processor and graphics sales.

Growth in client processor average selling price (ASP) was driven by a favorable mix of Ryzen desktop and notebook processor sales. GPU ASP growth in the reported quarter was driven by strong high-end graphics product sales, including data center GPU sales.

AMD’s Ryzen Embedded Processors and RDNA 2-based GPUs are now being used by Tesla (TSLA) to power the infotainment system in its new Model S and X vehicles.

Valve announced Steam Deck powered by a semi-custom AMD processor. AMD also introduced FidelityFX Super Resolution (“FSR”), its latest spatial upscaling algorithm feature, which boosts frame rates and delivers high-quality, high-resolution gaming experiences. More than 40 game developers have already pledged support for FSR.

Enterprise, Embedded and Semi-Custom segment revenues of $1.60 billion were up 183% y-o-y and 19% sequentially. The increase is attributed to higher semi-custom product sales and EPYC processor revenues.

EPYC's adoption rate continued to increase in the quarter. AMD and its partners, including Microsoft and Alphabet (GOOGL - Free Report) , announced several new high-performance computing systems. These include Microsoft Azure supercomputers for United Kingdom's Met Office, The Perlmutter supercomputer and The Singapore National Supercomputing Centre build.

How Much More Upside from $105?

In a moment, I'm going to share some Wall Street analyst reactions and their price target bumps for AMD. But I'll tell you right now that quite a few are sticky around $110. Some outliers see $125 and one is even targeting $150.

So can you still invest in AMD here even if you missed the good buys near $80? I think so and not only am I not selling any of my shares, I'll be looking to add on dips. For more insight into why I think this way, check out these two recent articles and videos I produced...

AI Dreams and Reality: Investing in Advanced Technology

NVIDIA and AMD: Digital Flywheels of Super-Exponential Innovation

Analysts Chime In

Here were select comments and price target (PT) moves by Wall Street semiconductor analysts...

Jefferies: Analyst Mark Lipacis kept AMD as one of his top picks and reiterated his $110 PT. Lipacis has over 2 decades experience in analysis of the semiconductor industry and he convinced me last year how quickly NVIDIA was going to ramp its datacenter business to be bigger than gaming, especially if the proposed ARM Holdings acquisition goes through. Now he sees AMD server share gains accelerating to be greater than 25% of their business this year. Lipacis estimates AMD server CPU revenues increased by 33% quarter-over-quarter, compared to 16% for Intel.

Mizuho: Analyst Vijay Rakesh raised the firm's PT on AMD to $110 from $107 and reiterated a Buy rating on the shares after the "strong" June quarter results. However, the analyst believes investors may be starting to get concerned over the 2022 and 2023 PC outlook. So here's a bull who was right all year heading into this quarter, but now is getting cautious and would probably be advising his clients to take some profits as the stock busts through $105 as I type on Thursday afternoon.

Susquehanna: Analyst Christopher Rolland raised his PT on AMD to $130 from $125 and kept a Positive rating on the shares. The analyst said he anticipated upside results and guidance but he had not expected the company to navigate supply constraints flawlessly and raise full year expectations. Another AMD bull who stays very bullish.

Raymond James: The analysts reiterated their Outperform rating and $110 PT, citing the unexpected boost in guidance being driven mainly by the server business. Their analysis, based on Intel and AMD guidance, suggests that AMD is poised to take about 2% server share in each of 3Q and 4Q, in contrast to Intel’s expectations to hold server share in 2H21. "And that’s before AMD launches the more powerful Genoa server platform, for which we expect significant incremental performance gains since that product will move to the TSMC N5 node."

That bit of industry code at the end refers to Taiwan Semiconductor and 5-nanometer technology. The RJ analysts sum up the competitive edge of AMD vs INTC: "Since Intel’s recent roadmap indicates that AMD will be working with a transistor advantage at least through 2024, we think AMD simply needs to continue doing what they’re doing and the market share will come their way." They raised their 2022 EPS estimates to $3.08 while the Zacks Consensus stood at $2.70 before the report.

Northland: Analyst Gus Richard raised his PT to $125 per share, noting "All product lines are driving growth and AMD is winning higher margin SKUs. We believe AMD outperformance is drive by superior products built on a superior manufacturing process. We do not expect this advantage to diminish any time soon.”

Rosenblatt: Analyst Hans Mosesmann hiked his PT to $150 per share from $135 following “another big beat-and-raise” quarter. “This time is even more compelling given industry supply chain shortages and an increasingly more vulnerable Intel (weaker portfolio and delays of next generation CPUs). AMD took up sales growth for 2021 to the 60% level from 50% (and 37% from January) on broad-based demand and share gains on everything they offer, literally. All new 5nm roadmap confirmed on-track for 2022.”

Now let's check in with a recalcitrant bear...

BMO Capital: Analyst Ambrish Srivastava raised the firm's PT on AMD to $80 from $75 but kept an Underperform rating on the shares. Despite strong Q2 results and guidance, with growth in the server "side business" remaining robust, the analyst believes AMD still faces a "re-energized" Intel and its market share gains will likely moderate.

As I've been saying all year, what bears don't get is that AMD is the #2 supplier behind NVIDIA in hyperscale datacenter... and #1 if you ask Google. Plus it trades at less than half NVDA's 17X sales valuation. Buy the dips in AMD.

And you'll get some (I hope), just like we did from $95 last winter down to $75. Maybe the next market pullback will give you another shot at $95. Maybe.