Share prices of Advanced Micro Devices (AMD 1.33%) have risen by over 68% so far in 2021. A burgeoning base of high-profile clients and fast-growing revenue have bolstered investor interest in the stock.
Nonetheless, such strong growth could lead to concerns about whether AMD can continue to deliver for investors. While the future remains uncertain, a closer look at its business and financials may provide some insight into where the chip stock could go in the future.
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The state of AMD
AMD stock has not only logged massive gains but has also handily beat the 27.2% gain for the S&P 500 over the same period. It has accomplished such growth due to a decision made in the middle of the last decade to focus exclusively on central processing units (CPUs) and graphics processing units (GPUs). This choice not only focused the company on its core strengths but has also made it a leading chip provider for gaming, data center, business, and personal computing applications.
Since its recovery, it has made notable gains in the gaming realm such as gaming laptops and esports applications, and it has won contracts to power Sony's PlayStation and Microsoft's Xbox. The company continues to expand its presence in both the metaverse and the cloud in general. In November, Meta Platforms announced it would power its metaverse applications using AMD chips.
Soon after, AMD announced that IBM had chosen the company's EPYC processors to manage customer workloads and solutions for the IBM Cloud. Additionally, a deal with Tesla could supercharge AMD stock in the long run. The automaker will add AMD processors to the Model Y that it sells in China, according to the news website Electrek. Other Tesla vehicles already use AMD chips.
The company has also dramatically expanded its presence in supercomputing. The number of supercomputers utilizing AMD processors has risen to 73, up from 21 over the last 12 months.
AMD financials
This move helped AMD generate $11.6 billion in revenue in the first nine months of 2021. This is a 78% increase compared with the first three quarters of 2020. During the first three quarters of 2021, net income came in at nearly $2.2 billion, rising 209% compared with the same period in 2020. Rising gross margins and an operating expense-growth rate helped to boost income despite the $262 million increase in income tax expense.
Admittedly, the next quarter does not appear quite as robust. The company forecasts between $4.4 billion and $4.6 billion in revenue in the fourth quarter. This would mean a 39% increase year over year at the midpoint, a sequential slowdown from the 54% revenue growth in Q3 compared with year-ago levels. This also represents 65% revenue growth year over year for the fiscal year. The company had predicted 60% revenue growth for fiscal 2021 in the prior quarter.
The question for AMD is how investors will react to a forecasted slowdown next year. For now, consensus estimates point to a 19% increase in revenue for 2022 and 27% higher earnings. While still robust, that represents a slowdown from 2021.
However, despite the massive gains in the stock, the P/E ratio has fallen from last year due to the substantial earnings increases. The current earnings multiple stands at about 45.
This is substantially higher than longtime rival Intel's P/E ratio of 10, which failed in recent years to keep up with AMD technologically. However, AMD compares well to Nvidia, which sells for just over 90 times earnings.
Can new investors profit from AMD stock?
Given current conditions, new investors can profit from AMD stock. In addition to its prominence in the gaming sector, it continues to win contracts that will give AMD a critical role in the cloud, metaverse, automotive, and supercomputing realms. Though a likely slowdown in revenue growth may put off some investors in the near term, its valuation should help AMD stock hold up against competitors and the S&P 500 in general.
