Please ensure Javascript is enabled for purposes of website accessibility

Is Advanced Micro Devices Stock a Buy?

By Nicholas Rossolillo - May 21, 2021 at 8:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Down over 20% from its peak, this is a hot name in the semiconductor industry.

In spite of a global chip shortage and soaring sales, Advanced Micro Devices' (AMD -4.47%) stock price has declined by over 21% from all-time highs registered in mid-January. The tech stock sell-off has taken a bite out of this fast-growing semiconductor name, and even a stellar first-quarter earnings report wasn't enough to rekindle investor optimism.

AMD may not stay down for long, though. Armed with a revamped lineup of microchips and picking up steam across its product portfolio, this looks like a solid buy as it continues to make inroads against its peers.

A great start to 2021

Executing a successful turnaround story, especially in the technology universe where innovation is a constant and never-ending battle, is easier said than done. But that's just what AMD has done. More than a decade removed from the spinoff of its chip manufacturing segment GlobalFoundries, years of research and development is starting to pay off. Sales have been up across the product portfolio for PCs, laptops, and data centers as AMD makes hay while Intel (INTC -2.27%) has stumbled as of late. And Microsoft's Xbox Series X and Sony's Playstation 5 selling like hotcakes was also a positive as AMD provided custom circuitry for both next-gen video game consoles.

Two people designing a semiconductor system in front of a computer displaying a chip design.

Image source: Getty Images.

Specifically, in the first quarter of 2021, the computing and graphics segment was just over 60% of sales and grew 46% year over year. Enterprise, embedded, and semi-custom chips (including data centers, networking, and the custom designs for the new Xbox and Playstation consoles) made up the balance of sales and surged 286% higher year over year. That segment also turned an operating profit in the first quarter, compared to an operating loss a year ago. All told, AMD had a fantastic start to 2021, especially considering it's building on the 45% sales increase it notched in full-year 2020.

Metric

Q1 2021

Q1 2020

YOY Change

Revenue

$3.45 billion

$1.79 billion

93%

Net income

$642 million

$222 million

189%

Free cash flow

$832 million

($120 million)

N/A

YOY=Year-over-year. Data source: AMD.  

The good times are expected to keep rolling this year as the global chip shortage is creating more sales outlets than manufacturers can provide for. It isn't a great situation for businesses that need chips to build higher-order products (like computers, autos, and industrial equipment), but it certainly is for chip designers like AMD. The company expects second-quarter sales to increase another 86% year over year and full-year sales to be up about 50% over full-year 2020.  

An opportunistic acquisition

During its evolution over the last decade, profit margins at AMD have been far lower than semiconductor industry peers. But the revamped product portfolio is starting to pay off. Operating profit margin was 16% in first-quarter 2021, still below the mid-20% range of the biggest chip designers out there, but AMD is well on its way to delivering healthy margins on its sales.

AMD Operating Margin (TTM) Chart

Data by YCharts.

The takeover of Xilinx (XLNX) will bolster these efforts. Xilinx is the leader in field-programmable gate array (FPGA) chips, and its combination with AMD will make the company an even scrappier thorn in Intel's side -- especially in the tech infrastructure and data center industries. Intel bolstered its FPGA presence with the acquisition of Altera in 2015 and Omnitek in 2019.

Besides strengthening the overall portfolio of semiconductors, Xilinx will also be a highly profitable addition to AMD. Its free cash flow profit margin was an enviable 33% of revenue in its recently completed fiscal year and will more than double AMD's annual free cash flow (Xilinx generated $1.04 billion in free cash flow the last 12 months). Xilinx will thus bolster AMD's research and development spend as well as raise the company's profitability overall.  

Excluding Xilinx from the equation, AMD stock looks like a long-term value right now. Shares trade for 53 times trailing 12-month free cash flow and 35 times 2021 expected earnings per share. It's growing sales well into the double digits, has rising profit margins, and is opportunistically increasing its market share while Intel tries to revamp its business model. NVIDIA's (NVDA -4.92%) expanding product portfolio centered on scooping up more share of data center designs might pose a threat down the road, but for now, both companies are growing at an incredible clip as they encroach on the turf Intel is vacating in the enterprise networking and cloud computing industry.

With 2021 off to a great start, I say AMD stock is a top buy in the semiconductor space.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of NVIDIA and Xilinx. The Motley Fool owns shares of and recommends Microsoft, NVIDIA, and Xilinx. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$95.95 (-4.47%) $-4.49
Intel Corporation Stock Quote
Intel Corporation
INTC
$35.38 (-2.27%) $0.82
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$178.49 (-4.92%) $-9.24
Xilinx, Inc. Stock Quote
Xilinx, Inc.
XLNX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.