When it comes to making powerful computer chips, Advanced Micro Devices (AMD 0.43%) is best-in-class. The company is an incredibly versatile producer, serving wide-ranging purposes that include gaming, the data center, and even virtual reality applications.
Chips, which are commercially known as semiconductors, have become one of the most important manufacturing components as consumer devices and commercial infrastructure demand an increasing amount of computing power. It places AMD in a great position for long-term growth, and the company is already making significant investments in future technologies.
Its stock has fallen 52% from its all-time high amid the broader tech sell-off, and the risk that a slowing economy could hurt consumer spending. But here's why it's a buy on the dip and could be a forever piece of any portfolio.
AMD is ingrained in the future of technology
AMD is responsible for powering consumer product royalty. Its chips are in both Microsoft's Xbox and Sony's PlayStation 5, which are the world's top gaming consoles. They also feature in Microsoft's surface line of notebook computers and tablet devices.
But it gets better (and bigger). AMD semiconductors can be found in Tesla's full line of electric vehicles, where they run the infotainment system in each car. These are not the same as the digital systems in most new, traditional combustion-powered cars. Tesla's infotainment systems control every aspect of the vehicle from the air conditioning to charging settings to browsing the internet, and even gaming.
Therefore, Tesla's choice to use AMD for such a critical part of each vehicle is a strong endorsement of the quality of the company's hardware.
But beyond the consumer product side, AMD also shines in commercial settings. Its chips power data centers used by some of the world's leading providers of cloud computing services including Microsoft, Amazon, and Alphabet's Google. In fact, in the recent first quarter of 2022, AMD deployed 70 new cloud instances for those multitrillion-dollar giants (among others).
AMD is thinking about the long run
Earlier this year, AMD completed its $49 billion acquisition of Xilinx, which is a world leader in adaptive computing. This technology has been in development for decades, but it's finding new potential use-cases because computing needs are evolving so quickly.
Traditionally, AMD has produced central processing unit (CPU) chips, and graphics processing unit (GPU) chips. When it finds new ways to deliver more performance, it designs new chips and releases them to the market, giving customers an opportunity to upgrade. Adaptive computing flips that process on its head -- it describes computer chips that can be reconfigured in a real-time, live environment, without the need for new hardware.
AMD believes this is the next frontier in computing, and it could drive the next decade (or more) of growth for the company. Between 2016 and 2021, AMD has grown its revenue at a compound annual rate of 30%, and analysts expect this will accelerate to 60% in 2022. Adaptive computing could refine AMD's edge in the semiconductor industry and breathe even more life into these numbers.
But the company is also highly profitable, generating $4.3 billion in non-GAAP net income over the last 12 months, which translates to $3.41 in earnings per share. Non-GAAP figures strip out one-off costs and some recurring non-operating costs like stock-based compensation, so they can provide a more accurate indication of how the actual business is doing.
Wall Street is bullish on AMD
AMD is a very popular stock among Wall Street analysts. Of the 40 who cover it, just one recommends to sell, and together they have an average price target of $134.89, which represents an upside of 74% from where it trades today.
One firm in particular -- Rosenblatt Securities -- thinks AMD stock could soar as high as $200 over the next 12 to 18 months. That leaves room for a gain of 158% for investors who buy in at the current price of $77.50.
But it's the long term that really matters. Within the next 10 years the semiconductor industry could exceed an annual value of $1 trillion. Given AMD's leadership position not only in current technologies but also in adaptive computing, its stock might have soared way past Rosenblatt's $200 target by that time.