Investors are getting a better picture of where stocks stand in this current uncertain economy as the companies report financial results for the second quarter. Some companies are not out of the woods yet, while others are showing improving revenue trends that could lead to an upside for their shareholders.
Amazon (AMZN -0.31%) and Advanced Micro Devices (AMD -1.96%) are certainly in the latter category. These leaders in e-commerce and semiconductors have not been immune to the macroeconomic headwinds over the last year, but both possess near-term catalysts that should support their share price performance and set the stage for more gains in the next bull market. Let's find out a bit more about these two discounted growth stocks and why they might be good buys for the next decade.
1. Amazon
Share prices of Amazon are up 66% this year. Revenue across the business grew 11% year over year in the second quarter, driven by higher revenue growth in online stores.
While overall revenue is up, analysts expressed some concern about slowing growth in Amazon Web Services (AWS), the company's highly profitable cloud computing arm. Amazon held its market share steady, so the slowdown is likely not related to competition. Rather, it is a broader slowdown in cloud spending as more current and potential customers choose to optimize costs.
Still, management had good news to relay as it saw AWS customers start to shift resources toward innovation and bringing new workloads to the cloud, which is a positive catalyst since AWS uses a pay-as-you-go pricing model. Although AWS reported lower growth in the second quarter, management reported that growth is beginning to stabilize.
Amazon also pointed out that companies it works with are increasingly interested in building custom models with artificial intelligence (AI) using in-house data. To address this need, Amazon invested in its own AI chips, which it says offer 40% better price performance than other leading processors on the market. AWS could benefit enormously over the next decade from the AI investment boom that is only just beginning.
Prospects for a recovery in Amazon's most profitable business (AWS) pushed the stock higher, but it's still trading at a discount. Investors value Amazon at a price-to-sales ratio of 2.6, which is only a slight premium to the market average. A company that is still capable of delivering double-digit sales growth in highly profitable areas like cloud computing is worth more than the average business.
2. Advanced Micro Devices
Advanced Micro Devices is a leading semiconductor company that competes with Nvidia in graphics processing units (GPUs) and Intel in the market for central processing units (CPUs) used in data centers and consumer PCs. AMD also supplies custom GPUs for game consoles and programmable chips in wireless applications.
Slowing demand across the chip industry hasn't phased investors so far this year. The stock is up 66% so far in 2023, despite AMD reporting lower revenue in the recent quarter. Investors are clearly more focused on the long-term trends in favor of more powerful processors that should drive above-average revenue growth.
While AMD said its revenue was down 18% year over year in the second quarter, it was stable over the first quarter. Looking deeper at the numbers reveals that revenue for data center chips grew 2% over the previous quarter, with consumer PC processors up 35% sequentially.
Investors might be overlooking the demand for AMD's MI300 accelerators launching in the fourth quarter for AI workloads. Nvidia is basically the only vendor of AI chips right now, but that will change. AMD reported very high customer interest from top cloud providers, large enterprises, and leading AI companies for the MI300 chips.
The weak PC demand is a headwind, but there's a catalyst emerging from AI software. AMD's Ryzen 7040 processors feature a dedicated AI engine -- the first x86 computer processor to do so. It's perfect timing as Microsoft plans to release new AI tools in its software, which could lead to significant demand for AMD's Ryzen chips.
Analysts expect AMD to report a decline in revenue in 2023 before returning to double-digit growth next year. There are clear catalysts on the horizon in AI, not to mention a possible recovery across the chip industry. Considering these factors, AMD's price-to-sales ratio of 8.4 appears too low relative to Nvidia's P/S ratio of 41. Just a small narrowing of that valuation gap, along with more revenue growth over the next decade, could spell great returns for shareholders.
