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1 Reason Why You Should Buy the Dip in AMD Stock

By Harsh Chauhan - Mar 2, 2021 at 9:10AM

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The chipmaker is witnessing tremendous traction in an area that could drive multi-year growth.

Advanced Micro Devices (AMD 1.39%) stock has stumbled out of the gate in 2021. Shares of the chip giant are down about 6% year to date, underperforming the broad market by a wide margin.

AMD Chart

Data by YCharts.

That's surprising as AMD is about to deliver yet another year of outstanding growth. The company has been dominating Intel in the CPU market and is sitting on favorable trends in the GPU (graphics processing unit) space where demand is substantially outpacing supply. It could also win big in server processors.

However, these are not the only catalysts for AMD in 2021. The arrival of a new generation of gaming consoles from Microsoft (MSFT 3.07%) and Sony (SONY -0.11%) is also turning out to be a major tailwind for the company -- one that could help the chipmaker exceed its own expectations as it supplies chips for both devices.

The new gaming consoles are witnessing unprecedented demand

The PlayStation 5 and Xbox Series X consoles have been setting the sales charts on fire in recent months. The PS5, for instance, sold 4.5 million units in less than 50 days since its launch on Nov. 12, according to Sony's fiscal 2020 third-quarter report.

The company expects its PS5 console to break the record of its predecessor and to exceed sales of 7.6 million units by the end of March. That would be slightly higher than the 7.5 million PS4 units Sony sold from Nov. 2013 through Mar. 2014. According to another estimate, Sony might ship as many as eight million new consoles by the end of this month, though that would depend on the company's ability to procure more components amid a global shortage of chips.

The long-term picture also seems bright. The PS5 is expected to clock consistently strong sales in the coming years and may eventually top 200 million units shipped per third-party forecasts. The PlayStation 2 has been Sony's best-selling console to date with lifetime shipments of approximately 159 million units, while the PS4 has reportedly shipped around 115 million units. The PS5 has a real shot at dethroning its predecessor in the long run as there are millions of console users in an upgrade window.

Microsoft's Xbox Series X, on the other hand, is also witnessing strong early demand. Niko Partners estimates that Microsoft moved 3.5 million units of its new console in November and December of last year. The firm points out that the figure would have been higher had Microsoft not underestimated demand and produced more consoles. Management says the new Xbox is likely to be in short supply until July this year with the company reportedly selling out every console that it made last quarter.

All of this indicates that the new gaming hardware is likely to remain in high demand, which bodes well for AMD's enterprise, embedded and semi-custom (EESC) business.

Keyboard button saying Buy stock

Image source: Getty Images.

And that demand has created a massive tailwind for AMD

AMD's EESC revenue shot up 176% year over year in the fourth quarter to $1.28 billion (the segment had delivered recorded just 7% revenue growth in the prior-year period). AMD management credited a ramp-up in the sales of semi-custom chips for this tremendous performance on the Jan. 26 earnings conference call:

Semi-custom sales increase year over year and sequentially based on strong demand for the next generation Sony and Microsoft consoles. Our semi-custom SoC sales are ramping faster than the last console cycle, and we expect sales to be better than typical seasonality in the first half of this year based on the current strong demand.

This indicates that the EESC business can continue to clock high growth rates in 2021, and that's great news for AMD as this segment produced 40% of total revenue last quarter. By comparison, the EESC business accounted for only 22% of the top line in the fourth quarter of 2019 when the new console cycle had yet to arrive.

Thanks to the rapid expansion of this business, as well as other growth drivers in CPUs and GPUs, analysts covering AMD stock have increased their earnings estimates significantly in the past month.

AMD EPS Estimates for Current Fiscal Year Chart

Data by YCharts.

At the same time, the stock has become cheaper because of its pullback. AMD is now trading at 42 times trailing earnings, way below the 2020 average earnings multiple of over 120. This should make AMD very attractive to growth investors as it aims to deliver 37% revenue growth in 2021 after last year's 45% increase.

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Stocks Mentioned

Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
$94.80 (1.39%) $1.30
Microsoft Corporation Stock Quote
Microsoft Corporation
$260.31 (3.07%) $7.75
Sony Corporation Stock Quote
Sony Corporation
$89.84 (-0.11%) $0.10
Intel Corporation Stock Quote
Intel Corporation
$41.99 (0.83%) $0.34

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