Advanced Micro Devices (AMD -5.44%) is showing no signs of slowing down. The chipmaker is riding several fast-growing tech trends that have supercharged its revenue and earnings growth in recent quarters, and those catalysts aren't going to disappear anytime soon.
In simple words, AMD seems to be in the middle of a multiyear growth curve. And if you haven't bought this growth stock just yet, now would be a great time to do so. Let's look at one of the biggest reasons why you should consider adding AMD to your stock portfolio.
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AMD's CPU market share gains could be its biggest catalyst
AMD gets 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). The segment's revenue is directly related to the health of the PC market, as well as the data center space, where graphics cards are deployed for accelerating workloads.
AMD's computing and graphics revenue shot up 65% year over year in the second quarter to $2.25 billion, accounting for 58% of the total revenue. The company credited this terrific growth to increases in the average selling price (ASP) and shipments of its Ryzen processors that are used in laptops and desktops. According to AMD, its revenue share in the client processor market has now improved for five straight quarters.
The company is witnessing strong demand for its high-end processors like the Ryzen 9 series, which saw shipments more than double year over year. Meanwhile, AMD's new Ryzen 5000 series notebook processors helped it record a seventh straight quarter of record revenue in the mobile processor space.
AMD is benefiting from a mix of higher volumes and stronger pricing in the client processor market. This isn't surprising, as the chipmaker has been eating away at Intel's (INTC -2.40%) dominance in the CPU space. According to PC benchmark provider PassMark Software, AMD exited Q2 with a CPU market share of 44.1%, a nice jump from the year-ago period's share of 35%. Intel commands the rest of the market, though it has been losing ground to AMD since the arrival of the Ryzen series processors.
It is also worth noting that AMD's improved pricing power has led to an increase in processor ASPs. Intel, on the other hand, is struggling with a steep decline in ASPs. Chipzilla's desktop processor ASP dropped 5% year over year last quarter, while notebook ASPs were down 17% after it resorted to discounting to move more units. AMD, on the other hand, is using its technology and performance advantage over Intel's chips to charge a premium for its processors, and customers are clearly willing to pay, given the higher shipments.
AMD is likely to take more market share away from Intel, because the former is expected to launch its next-generation Zen 4 CPUs next year, which would be based on a 5-nanometer manufacturing process. AMD's current Zen 3 chips are based on a 7-nanometer node, which means that the next-generation chips can deliver improved computing performance and reduce power consumption.
That's because the transistors on a smaller process node are closely packed together, which makes them more power efficient and capable of carrying out more calculations. More importantly, the move to a 5-nanometer process would put AMD at a great advantage over Intel.
Image source: AMD.
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 pack more cores into its processors, make them more power-efficient, and generate superior performance at the same time.
Chipzilla is expected to move to a 10-nanometer platform later this year once its Alder Lake desktop CPUs are launched. That could give AMD a headache, as Intel says that its 10-nanometer node packs in more transistors than AMD's 7-nanometer process. However, AMD should be ready to make the jump to the 5-nanometer process by the end of this year, which would help it maintain its advantage over Intel.
Big financial gains could be on the cards
AMD's computing and graphics segment is still quite small when compared to Intel's. For instance, Intel generated $10.6 billion in revenue from its client computing group (CCG) last quarter, which was more than four times AMD's revenue from its computing and graphics business.
AMD launched its first-generation Ryzen processors in 2017, and they have supercharged the computing and graphics business. The segment's revenue had jumped to $3 billion in 2017 from $1.97 billion in 2016. In 2020, AMD generated $6.4 billion in revenue from the computing and graphics segment, so the business has more than doubled in three years.
Meanwhile, Intel's CCG revenue stood at $40.1 billion in 2020, up just 22% from $32.9 billion at the end of 2016. Clearly, AMD is growing at a much faster pace 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 its revenue from the sale of client processors.
AMD's technological advantage over Intel could help it maintain the terrific pace of growth of its largest business segment by way of additional market share and stronger pricing. Not surprisingly, analysts expect AMD to clock 32% annual earnings growth for the next five years. Given that AMD shares are now trading at 38 times trailing earnings as compared to their five-year average multiple of 120, it is a top growth stock to buy right now since it can add billions of dollars to its revenue and substantially boost earnings by consistently hurting its bigger rival.
