The stock market is historically one of the best vessels investors can use to generate long-term wealth, but this year hasn't been easy. The Nasdaq-100 index, which is often seen as a tech sector benchmark, has declined 26% so far in 2022.
Navigating down markets can be tricky, but they're also the best time to put money to work, because a recovery to new highs always follows over time, broadly speaking. When it comes to finding a quality bargain, it can help to watch what professional investors on Wall Street are recommending.
Advanced Micro Devices (AMD -5.44%) is one of the largest producers of semiconductors in the world. Its stock hit a 52-week low of $71.60 in July, and one Wall Street firm thinks it could soar to $200 over the next 12 to 18 months. The stock has already rebounded to about $80 per share, but that still leaves plenty of upside potential for investors who buy now.
Image source: Getty Images.
AMD diversifies and conquers
Advanced Micro Devices' greatest strength might be its operational diversity. Its revenue comes from a healthy mix of consumer and business end users, which partly insulates it from the broader economic slowdown currently driven by soaring inflation and rising interest rates.
For example, AMD's gaming segment generated $1.7 billion in revenue during the second quarter of 2022 (ended June 25), growing 32% year over year. That's a solid increase at face value, but it significantly lagged the company's total revenue growth of 70%. When consumers feel the pinch from tighter economic conditions, they tend to spend less money on expensive discretionary items like graphics chips for gaming and entertainment. AMD isn't alone; one of its largest competitors also saw a rapid deceleration in its gaming business.
On the other hand, AMD's data center revenue rocketed 83% higher to $1.5 billion. This was primarily driven by the company's business customers spending more money on cloud computing infrastructure. AMD's chips are in demand from some of the largest cloud providers in the world, including Amazon Web Services and Microsoft Azure, the top two in the industry by revenue.
Put simply, while consumer spending was soft in the second quarter, businesses continued to invest heavily in new hardware for data center applications, which picked up the slack and helped carry the company's total revenue higher.
AMD enters a new frontier with Xilinx
Investors with a five- to 10-year time horizon should be focusing on AMD's recent $49 billion acquisition of Xilinx, the leader in adaptive computing. AMD believes this technology is the next frontier in semiconductor hardware, and the combined company is set to lead the globe in high-performance computing going forward.
Chipmakers are constantly designing new hardware for specific use cases and to meet different performance requirements. Once those chips are made, they remain in a solid state and the only way to gain better performance is to swap them out for newer, upgraded models. Adaptive computing describes hardware that can be reconfigured even after it is manufactured, so it can adjust to the user's needs in real time -- in other words, in a live environment.
This has unprecedented benefits in areas like artificial intelligence (AI), where advancements are happening so quickly that semiconductor hardware capabilities are actually causing a bottleneck because upgrade cycles are too infrequent. Since data centers are now used as training grounds for AI and machine learning models, AMD might be setting itself up to hold a leadership position in that segment for years to come.
Wall Street is on board with AMD stock
Of the 39 Wall Street analysts who cover AMD stock, just one recommends selling. The overwhelming majority -- 24 analysts -- have given it the highest-possible buy rating. They have an average price target of $120.73, which is 50% higher than the company's current share price.
But one Wall Street analyst firm, Rosenblatt Securities, thinks AMD stock could soar to $200. That represents potential upside of 150% from the current price, and if it gets there, it would be a 179% gain since AMD hit its 52-week low back in July.
It's worth noting that AMD is a highly profitable company with $3.83 in non-GAAP (adjusted) earnings per share over the last four quarters. That result gives its stock a price-to-earnings ratio of just 21, which is even cheaper than the broader tech market, so now can be a great opportunity to buy.
