The semiconductor industry has fared well since March’s stock market plummet. Year to date, the PHLX Semiconductor Index is up 8.7%, compared with the S&P 500’s 1.3% drop for the same period.
One of the largest chip makers, Advanced Micro Devices (NASDAQ: AMD), has done even better. The stock has risen 14% year to date, and AMD shares were trading at $53.20 midday on Friday. AMD’s 52-week high is $59.27.
Bank of America this week reiterated its Buy rating for AMD. The stock has 19 Buy recommendations, 14 Holds and one Sell. The average 12-month price target is $51.97, below the current price.
Despite trading over the analysts’ average target, AMD is optimistic about the remainder of the year. “We are on track to deliver 21% year-on-year revenue growth with our Q2 execution,” said AMD Chief Financial Officer Devinder Kumar. He spoke this week at a global technology conference sponsored by Bank of America.
“On a quarterly basis, we expect to see solid growth from EPYC (the company’s popular processor),” Kumar said. “We have expanded our margins on the strength of the new products by more than 10 points in the last few years. And this product portfolio is addressing profitable markets, including the commercial and data center space.”
Growing Cloud Means More Data Centers
The coronavirus pandemic has driven data center growth. “We have seen several cloud providers accelerate infrastructure deployment to address rising demand from the growing number of users working and schooling from home,” Kumar said. “In fact, one of our large cloud customers even deployed 10,000 second-generation EPYC servers in less than 10 days to support the surge in demand for their collaboration services.”
Northland Securities analyst Gus Richard expects AMD to gain market share in the server space with the launch of the new Milan line of EPYC later this year. “We believe these products are relatively immune if the macro weakens,” Richard said.
AMD expects data centers to eventually account for about 30% of its business. “I truly believe that with Milan coming to the fall, 2020 is an inflection year for the server business,” Kumar said. “Milan allows us to go into the bulk and almost all of the server space.”
Video Games Aren’t Child’s Play
Northland’s Richard is also bullish about video games. “In our view, AMD is well positioned … as new game consoles launch for the holiday season,” he said in a recent note. The Sony PlayStation 5 and Microsoft Xbox Series X both will contain customized AMD chips.
The lingering impacts of the coronavirus pandemic should boost gaming sales. “We believe COVID-19 likely will amplify demand for new game consoles during the holidays,” Richard said. “We are conservatively modeling console revenue to be a little over $1 billion in CY20.” In fact, Northland thinks demand will remain strong going into 2021. “In addition, as the holidays approach there will likely be a flood of publicity to stoke demand.”
Northland has assigned an Outperform rating to AMD, with a price target of $67.50.
AMD’s gaming deals should have lasting impact. “It’s an exclusive relationship with Sony and Microsoft, and that is something that we can count on for many, many years to come,” Kumar said.
AMD has also partnered with Google to work on their Stadia cloud streaming platform. “We believe cloud gaming will become more and more popular over time just like video streaming, because you can play any game at any time in any place on any hardware,” Kumar explained.
PC Market Share Push
Consumer PCs, traditionally a strong segment for AMD, could be a tough area. “We expect … COVID-19 and the resulting economic uncertainty may lead to some weakness in the consumer PC demand, in particular in the second half of the year, and we are watching that very carefully,” Kumar said.
But Kumar sees growth potential with chips for laptops. “We are on track to accelerate our mobile growth this year with customers like Acer and ASUS and Dell, HP, Lenovo … as we expect to launch more than 135 new Ryzen powered consumer and commercial notebooks over the coming quarters,” he said. Ryzen is AMD’s processor brand.
Even if the overall PC market remains flat, AMD’s strategy is to gain market share. “We want to continue to build the AMD brand in the PC market,” Kumar said.
GPU Battle
AMD continues to battle Nvidia (NASDAQ: NVDA) in the graphics processing unit (GPU) space. Nvidia popularized the term GPU in 1999 and has been a leader in its development since that time. Initially used in personal computers as an advance beyond the central processing unit (CPU), GPUs are now critical elements of advanced computing and artificial intelligence.
Kumar sees “a tremendous growth opportunity for both gaming and data center GPUs over the next five years.” The company has created two GPU development tracks, one focused on gaming and the other on data centers.
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