Why AMD is a Growth Stock to Buy Now
Advanced micro-systems (NASDAQ: AMD) shows no signs of slowing down. The chipmaker is riding several fast-growing tech trends that have inflated both revenue and profit growth in recent quarters, and those catalysts aren’t going away anytime soon.
Simply put, AMD appears to be in the middle of a multi-year growth curve. And if you haven’t bought that Growth Stock yet, now might be a great time to do so. Let’s take a look at one of the main reasons why you should consider adding AMD to your stock portfolio.
AMD’s processor market share gains could be its biggest catalyst
AMD derives most of its revenue from the computing and graphics segment, through which it sells its Ryzen central processing units (CPUs) and Radeon graphics processing units (GPUs). Segment revenue is directly related to the health of the PC market, as well as the data center space, where graphics cards are deployed to accelerate workloads.
AMD’s IT and graphics revenue grew 65% year-over-year in the second quarter to $ 2.25 billion, or 58% of total revenue. The company attributed this tremendous growth to increases in the Average Selling Price (ASP) and shipments of its Ryzen processors used in laptops and desktops. According to AMD, its revenue share in the client processor market has now improved for five consecutive quarters.
The company is seeing strong demand for its high-end processors like the Ryzen 9 series, whose shipments have more than doubled year over year. Meanwhile, AMD’s new Ryzen 5000 series notebook processors have helped it achieve a seventh consecutive quarter of record revenue in the mobile processor space.
AMD enjoys a mix of higher volumes and higher prices in the client processor market. This is not surprising, because the chipmaker has gnawed Intelligence‘s (NASDAQ: INTC) dominance in CPU space. According to benchmark PC vendor PassMark Software, AMD left the second quarter with a 44.1% processor market share, a good jump from the 35% share in the period a year earlier. Intel dominates the rest of the market, although it has lost ground to AMD since the arrival of the Ryzen series processors.
It’s also worth noting that AMD’s improved pricing power has resulted in an increase in processor ASPs. Intel, on the other hand, is grappling with a sharp drop in ASPs. Chipzilla’s desktop ASP processor fell 5% year-on-year in the last quarter, while notebook ASPs fell 17% after resorting to discounts to move more units. AMD, on the other hand, is using its technology and performance advantage over Intel’s chips to charge extra for its processors, and customers are clearly willing to pay, given the higher shipments.
AMD is likely to take more market share from Intel, as the former is expected to launch its next-generation Zen 4 processors next year, which are said to be based on a 5-nanometer manufacturing process. AMD’s current Zen 3 chips are based on a 7-nanometer node, which means the next-generation chips can offer improved computing performance and lower power consumption.
This is because the transistors in a smaller process node are tightly packed against each other, making them more energy efficient and capable of performing more calculations. More importantly, switching to a 5 nanometer process would give AMD a big advantage over Intel.
Intel’s current Rocket Lake desktop processors are based on the old 14-nanometer process, while AMD uses a modern 7-nanometer process. As a result, AMD can fit more cores into its processors, make them more energy efficient, and generate higher performance at the same time.
Chipzilla is expected to upgrade to a 10-nanometer platform later this year once its Alder Lake desktop processors launch. It could give AMD a headache, as Intel says its 10-nanometer node has more transistors than AMD’s 7-nanometer process. However, AMD should be ready to switch to the 5 nanometer process by the end of this year, which would help it maintain its edge over Intel.
Big financial gains could be waiting for you
AMD’s IT and graphics segment is still quite small compared to Intel’s. For example, Intel generated $ 10.6 billion in revenue from its Customer Computing Group (CCG) in the last quarter, more than four times AMD’s revenue from its computing and graphics businesses.
AMD launched its first generation Ryzen processors in 2017, and they supercharged the computing and graphics business. Segment revenue had jumped to $ 3 billion in 2017, from $ 1.97 billion in 2016. In 2020, AMD generated $ 6.4 billion in revenue in the computer and graphics segment, so the activity has more than doubled in three years.
Meanwhile, Intel CCG revenue was $ 40.1 billion in 2020, up just 22% from $ 32.9 billion at the end of 2016. Clearly, AMD is growing at a pace much faster than Intel thanks to its market share gains. More importantly, the size of Intel’s CCG business indicates that AMD has a huge opportunity ahead to increase revenue through the sale of client processors.
AMD’s technological advantage over Intel could help it maintain the formidable growth rate of its largest business segment through additional market share and higher prices. Unsurprisingly, analysts expect AMD to post 32% annual profit growth over the next five years. Considering that AMD stocks are now trading at 38 times rolling earnings from their five-year average multiple of 120, this is a growth stock to buy right now as it can add billions of dollars. to its income and greatly increase its profits by injuring its biggest rival.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.