Shares of Advanced Micro Devices (AMD 1.06%) have been hammered on the market in 2022, losing as much as 45% of their value, but the chipmaker has given investors some relief recently thanks to the broader stock market recovery.
Major indices such as the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite eked out gains last week. Those gains extended to AMD stock, which was up 7% last week. But does this mean investors have lost an opportunity to buy shares of this fast-growing semiconductor play on the cheap? Let's find out.
Is AMD stock still affordable after its latest rally?
AMD stock is available at an attractive valuation, even after last week's gains. Its price-to-earnings (P/E) ratio of 32 may not be cheap when compared to the Nasdaq 100's multiple of 25, but it is worth noting AMD previously traded at much higher levels, as its five-year average earnings multiple of 103 indicates.
The forward earnings multiple of 20 is also quite attractive and indicates the chipmaker's earnings are expected to increase at a nice pace in the coming year. Management's 2022 outlook has revenue up 60% to $26.3 billion following the completion of its acquisition of Xilinx.
It previously guided for 31% top-line growth this year, but Xilinx will give AMD a major boost by unlocking a massive market opportunity in field-programmable gate arrays (FPGAs) and adaptive chips that power a range of applications such as data centers, 5G wireless infrastructure, and automotive, among others.
Additionally, AMD forecasts an adjusted gross margin of 54% for 2022, compared to its earlier estimate of 51%. That would be a big jump over last year's adjusted gross margin of 48% with the potential to flow through to the company's bottom line.
As such, AMD stock remains attractive even after its rally last week. More importantly, the stock's valuation is too good to ignore, as there are multiple catalysts that should ensure healthy long-term growth and help AMD deliver more upside.
More reasons why the stock looks like an enticing bet right now
Wall Street is upbeat about AMD's prospects. KeyBanc Capital Markets analyst John Vinh has a $150 price target on AMD stock, which is 75% higher than current levels. Vinh says the adoption of AMD's server processors has strengthened lately with more cloud providers launching services based on those chips.
Morgan Stanley analyst Joseph Moore is also bullish on AMD's data center prospects. He points out that data center products now account for 50% of the company's gross margin. Moore estimates AMD's data center offerings could produce 65% to 70% of its gross margin in the future on the back of an improvement in the company's market share in this space.
The data center market represents a multibillion-dollar revenue opportunity for AMD, and the company is poaching market share from Intel (INTC 1.38%). AMD controlled an 11.6% share of the server market in the first quarter, up 2.7 percentage points from the year-ago period, according to Mercury Research.
AMD's server market share could climb as high as 35% based on Bank of America's long-term estimates, which wouldn't be surprising given Intel's struggles to launch competitive chips. Intel has delayed the launch of its Sapphire Rapids server processors once again. These chips were supposed to hit the market last year, but they are now expected to only move into volume production in 2023.
Meanwhile, AMD's fourth-generation EPYC server processors are set to hit the market in the fourth quarter this year. Based on a 5-nanometer (nm) manufacturing process, AMD claims these processors could deliver a 75% gain in performance over the current generation of chips. Intel, on the other hand, will remain stuck on a 10nm process node even when it launches its Sapphire Rapids processors.
AMD's smaller process node means its chips should ideally pack more processing power and consume less energy. This widening of the technology gap would set the stage for AMD to boost its market share further and corner a bigger chunk of data center processor revenue.
Such solid tailwinds make it clear why analysts are forecasting 33% annual earnings growth from AMD over the next five years. So investors who haven't taken advantage of the slide in this tech stock still have an opportunity to do so given its attractive valuation and bright prospects.
