The stock of Advanced Micro Devices (AMD 1.31%) held steady after the chipmaker posted its third-quarter earnings report on Tuesday.
Its revenue rose 54% year over year to $4.31 billion, beating estimates by $200 million. Its adjusted net income increased 78% to $893 million, or $0.73 per share, which also cleared expectations by $0.07. For the fourth quarter, AMD expects its revenue to rise about 39% year over year, compared to analysts' expectations for 31% growth.
Those headline numbers are impressive, but investors might be reluctant to touch AMD's stock after its price has advanced about 50% over the past 12 months. Let's examine three reasons to buy AMD right now (as well as one reason to sell it) to see if this hot chipmaker is still a worthwhile investment.
CEO Lisa Su of AMD. Image source: AMD.
1. AMD is still profiting from Intel's mistakes
AMD's comeback over the past seven years was driven by two main catalysts. First, Dr. Lisa Su took over as the CEO and led the development of its new Ryzen CPUs for PCs and Epyc CPUs for data centers. These new chips addressed the poor single-threaded performance of AMD's previous CPUs and challenged Intel (INTC 4.13%) with more cost-efficient processors.
Second, Intel repeatedly stumbled with chip shortages, delays, and leadership changes. It fell behind Taiwan Semiconductor Manufacturing (TSM 1.17%), or TSMC, in the process race to create smaller and more power-efficient chips. This enabled AMD, which outsourced its production to TSMC, to pull ahead with more-advanced chips.
Here's how rapidly AMD has grown its market share across the desktop, laptop, and server markets against Intel, according to PassMark Software:
|
Platform |
Desktop |
Laptop |
Server |
Total Share |
|---|---|---|---|---|
|
AMD Q4 2014 |
29.5% |
11.1% |
2.1% |
23.4% |
|
AMD Q4 2021 |
48.9% |
25.2% |
11.3% |
39.4% |
|
Intel Q4 2014 |
70.5% |
88.8% |
97.9% |
76.6% |
|
Intel Q4 2021 |
51.1% |
74.7% |
88.7% |
60.4% |
Source: PassMark Software.
AMD's recent partnership with Microsoft (MSFT 1.12%) to launch new Windows 11 PCs with Ryzen CPUs and Radeon GPUs indicates its share of the PC market will continue to grow. Its new cloud deals with Alphabet's Google, Amazon, and Cloudflare will also ensure that Epyc continues to gain ground against Intel's Xeon processors in the data center market.
AMD's data center business will likely grow even stronger if it closes its planned acquisition of the programmable chipmaker Xilinx (XLNX +0.00%) this year.
2. Robust growth rates with rising margins
In the first nine months of 2021, AMD generated 58% of its revenue from the computing and graphics division, which sells its PC CPUs and GPUs. The remaining 42% came from its enterprise, embedded, and semi-custom (EESC) division, which primarily sells its Epyc CPUs for data centers and custom accelerated processing units (APUs) for Sony and Microsoft's gaming consoles.
Here's how those two businesses fared in fiscal 2020 and the first nine months of 2021:
|
Revenue Growth (YOY) |
FY 2020 |
9M 2021 |
|---|---|---|
|
Computing and graphics |
37% |
51% |
|
EESC |
65% |
137% |
|
Total |
45% |
78% |
Source: AMD. YOY = year over year. FY = fiscal year.
As those two businesses grew, AMD's margins expanded as it sold more higher-margin Epyc, Ryzen, and Radeon chips:
|
Period |
FY 2020 |
9M 2021 |
|---|---|---|
|
Gross Margin |
45% |
47% |
|
Operating Margin |
14% |
21% |
Source: AMD. FY = fiscal year.
AMD expects its full-year revenue to rise 65% with an adjusted gross margin of approximately 48%. Analysts expect its adjusted earnings to increase by 93% for the full year.
3. Reasonable valuations
AMD has been a red-hot stock over the past year, but it still looks reasonably valued at 40 times forward earnings. It might seem a lot pricier than Intel, which trades at just 11 times forward earnings, but AMD arguably deserves a higher premium while Intel deserves a deeper discount.
AMD is firing on all cylinders under a visionary CEO, and outsourcing its chip production to TSMC enables it to avoid all of Intel's first-party foundry headaches. Meanwhile, Intel needs to execute a costly turnaround to reverse its market share losses.
The one reason to sell AMD: Intel's potential comeback
Intel's recent third-quarter report indicates its turnaround won't happen anytime soon. But CEO Pat Gelsinger, an engineering veteran who took the helm last February, believes Intel can reclaim the process lead from TSMC by 2025 by aggressively expanding and upgrading its plants.
Many investors are dismissing Intel as an also-ran right now, but they should recall that AMD nearly overtook Intel back in 2006 before Intel struck back with aggressive research and development and marketing efforts. So if Intel finally gets its act together, AMD's second heyday could abruptly end.
AMD is still a great long-term investment
Intel's potential rebirth under Pat Gelsinger might generate unpredictable headwinds for AMD over the next few years. But I believe AMD still has a much brighter future than Intel -- and its strengths should continue to outweigh its weaknesses as long as Lisa Su remains in charge.
