2022 has been an ugly year for tech stocks, even for those companies that are fast-growing and profitable. The market has become hyper-focused on valuations, and the growing risk of a recession. The U.S. Federal Reserve's aggressive interest rate posturing has ensured that anxiety runs high right now.
Advanced Micro Devices (AMD -0.35%) is a gem in the semiconductor industry and one of the stocks that is being wrongfully taken out with the garbage. Not only is this a fast-growing business, but the company is also profitable and those profit margins are rising. If you can stomach the current turbulence and plan on holding for at least a few years, this is a top tech stock to consider buying right now. Here's why it tops my list.
A new emerging market leader
Long considered the second fiddle to Intel (INTC 0.64%), AMD's suite of semiconductors has been building momentum for over a decade now. The company made some hard decisions during the Great Recession of 2008-09. Instead of limping along with an integrated chip design and manufacturing business model, AMD decided to offload its fab segment (it became the company now known as GlobalFoundries) and go all-in on design work.
That has given AMD the resources to steadily eat into Intel's lead in processors, a lead that even current Intel CEO Pat Gelsinger has admitted might get slimmer in the next couple of years. This is occurring not just for processors used in consumer electronics like PCs and laptops, but also in the highly lucrative and fast-growing enterprise market, which encompasses cloud computing infrastructure.
As AMD has built up its momentum, it's swung from frequently unprofitable a decade ago to highly profitable today. It's used this newfound profitability to help fund multiple acquisitions, including enterprise server start-up Pensando early this year. The mega-merger with Xilinx (the leader in field-programmable gate arrays) early in 2022 also opened up a new front against Intel and gives AMD another way to bundle its hardware orders together for customers seeking ways to consolidate purchases to save a little money.
AMD could also pick up some more market share in the video gaming realm too. Long-time gaming GPU leader Nvidia (NVDA -3.33%) unveiled its new generation of high-end graphics cards late in September (the RTX 4080 and RTX 4090), and the price tag is being decried as "too steep" by many gamers. AMD was ready with an alternative, previewing its own new GPU lineup (the RX 7000 series) at a competitive price. We'll get more details from AMD in November on how its gaming efforts did. While these GPUs may not boast the same raw computing power Nvidia does, many enthusiasts might choose to switch to AMD if the price is right.
Changing of the guard could take years
This steady changing of the guard could take years, and bring lots more upside for AMD shareholders. In its battle against Intel, in particular, AMD could have a serious edge. Intel has ceded lots of market share in recent years and is having its own struggles now with a lack of resources. The company wants to bet on manufacturing, an expensive and very long-term undertaking. But money is a finite resource. Building new chip fabs might simply be leaving too little moola for Intel to keep pace with AMD's engineering teams.
This isn't just a story of AMD stealing lunch from its peers. The semiconductor industry is undergoing rapid change and expansion right now. Estimates point toward global chip demand reaching $1 trillion a year by 2030, some 60% higher than global sales today. That would be welcome news for Intel shareholders too, and for all chip stocks in general for that matter. But AMD could have the most to gain with its broadly diversified components, many of which now tout technological superiority over peers.
The proof AMD is a good buy right now might simply be in the immediate-term numbers. While Intel is projecting a sizable decline in revenue in 2022, AMD anticipates robust 60% year-over-year growth. Granted, a significant amount of this is attributable to the Xilinx takeover, but not all of it. AMD's progress stands on its own two feet. Before Xilinx was in the fold, AMD was projecting 31% growth this year.
As of the end of June, AMD had $6 billion in cash and short-term investments, offset by debt of $2.8 billion. And in spite of its enduring growth, shares have been clobbered by over 50% this year. The stock now trades for 32 times enterprise value to trailing 12-month free cash flow. For a company that is benefiting from both growing revenue and rising profit margins, and with years of industry expansion laying ahead of it, this looks like a reasonable valuation.
This assumes, of course, you're not bothered by near-term stock market uncertainty, and are looking for a chip stock to buy and stash away for at least a few years. If that's the case, I think AMD is worthy of a "top stock to buy now" title.
