What happened
Shares of Advanced Micro Devices (AMD 1.33%) fell 20.6% in January, according to data provided by S&P Global Market Intelligence. 2022 got off to a rough start for growth stocks, which are sensitive to changes in interest rates. The U.S. Federal Reserve indicated it will be raising its benchmark rate to try to tamp down inflation, sending high-flying stocks in retreat. AMD was no exception.
Image source: Getty Images.
So what
The decline in share price comes in spite of strong ongoing demand for AMD and other semiconductor designers. After all, even after its tumble, AMD stock was trading for a hefty 47 times trailing-12-month free cash flow at the end of January. It's completely normal for premium-priced stocks to endure some bouts of volatility.
However, because of effects from the pandemic and the proliferation of chips throughout the economy, the world is starting year two of a chip shortage. Because many chipmakers can't keep up with demand, the sales cycle is being extended -- with some deliveries being pushed back six to 12 months, occasionally even more, from the time of order.
Now what
The end result of the chip shortage for AMD is another year of strong expected growth. During the company's Q4 2021 earnings update, management reported fourth-quarter and full-year sales growth of 49% and 68%, respectively. The outlook for the first quarter of 2022 implies 45% year-over-year sales growth at the midpoint, and predicted full-year 2022 revenue would increase another 31% over 2021 (which does not include the pending merger with Xilinx).
Additionally, adjusted gross profit margin on product sold is expected to be 51% in 2022, up from 48% in 2021. Clearly, with both the top and bottom lines expanding rapidly, AMD stock is worth that lofty premium.
Do bear in mind, though, that eventually (no one knows exactly when) the chip shortage will end. It remains to be seen if the semiconductor industry will hit another cyclical sales slump when that happens. Historically, periods of booming sales are followed by a year or two of cool off, and stocks like AMD can hit some more prolonged turbulence.
Nevertheless, over the course of the next decade, overall growth in computing and demand for chips in new areas like autos and industrial connectivity should provide plenty of growth runway for this top chip designer.
