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Why AMD Stock Soared 57% Higher in 2021

By Nicholas Rossolillo – Jan 5, 2022 at 10:52AM

Key Points

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The chip designer has gone from underdog to industry favorite -- and isn't looking back.

What happened

Shares of scrappy chip-industry underdog AMD (AMD -2.12%) rocketed 57% higher in 2021, according to data provided by S&P Global Market Intelligence. It builds on an incredible run the company has been on in recent years. Since the start of 2018, AMD stock is up a whopping 1,300%.  

Someone holding a tablet. A brain made of electrical connections hovers above the screen.

Image source: Getty Images.

So what

AMD's success is thanks to its technological advancements in chip design for PCs and data centers. The company laid the foundation for this transformation back in 2009 when it spun off its chip-fabrication division Globalfoundries (GFS -2.29%) and then sold off its remaining equity stake in 2012. Since then, AMD has had flexibility in choosing manufacturing partners, and this flexibility has allowed the company to double down on its chip-design engineering.  

The result has been an ascendant AMD that is gobbling up market share from Intel (INTC 0.38%), which still boasts the largest slice of the semiconductor industry's annual sales. With Intel's trailing 12-month revenue haul at $78 billion compared to AMD's comparatively small $15 billion, there's still plenty of room for AMD to keep expanding from here. For the record, AMD sales grew 52% through the first nine months of 2021 compared to less than 1% increase for Intel's revenue.  

Now what

AMD is in the process of acquiring fellow circuitry engineer Xilinx (XLNX). The deal is expected to close during the first quarter of 2022, pending sign off from Chinese regulators. Xilinx, which specializes in field programmable gate arrays (FPGAs), is also growing faster than Intel's FPGA segment and will be a brand new department for AMD once the merger is complete. Xilinx's growth and higher profit margins also help explain AMD stock's big jump in the last year.

After several years of surging growth, AMD could see a slowdown in its trajectory in 2022. Nevertheless, a new era of cloud-based computing is here, and this once small and oft overlooked company is a top-notch play for investing in the cloud-hardware upgrade cycle that is now underway. The stock does trade for a premium 57 times trailing 12-month free cash flow to kick off the new year, but this isn't an unreasonable price tag considering rapidly improving profit margins at the company. Nevertheless, if shares hit a patch of turbulence this year, remember to stay focused on AMD's long-term potential for the duration of the 2020s.

Nicholas Rossolillo and his clients own Advanced Micro Devices and Xilinx. The Motley Fool owns and recommends Advanced Micro Devices and Intel. The Motley Fool recommends Xilinx 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.

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