In 2018, Advanced Micro Devices (NASDAQ:AMD) was the S&P 500‘s top performing stock, rising nearly 80% as the small but rapidly growing chipmaker continued to gain share on its far larger (and far more valuable) peers, Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). AMD has continued to gain share in 2019, and AMD stock has continued to rally.
Year-to-date, AMD is the S&P 500’s second best performing stock, up another near 80% through early July.
In other words, AMD stock has been a really good long term investment. In 2018, it was the top stock in the S&P 500. In 2019, it’s been the second best stock in the index. That sort of continued out-performance is rare.
Will it continue? How much longer can AMD stock stay red hot for?
A Closer Look at AMD
The reality is that, while an 80% gain over six months is not repeatable, AMD stock will stay on a healthy longer term uptrend so long as three things remain true:
The market share expansion narrative remains alive and well. Macroeconomic and market conditions remain healthy. The valuation on AMD stock remains reasonable.
Right now, AMD checks off all three of those boxes. As such, the stock projects to stay on an uptrend for the foreseeable future.
AMD Has Formed a Nice Uptrend
Since early 2018, AMD stock has formed a healthy and steady uptrend as the company’s core growth narrative has gained credibility and traction.
That core growth narrative is pretty easy to understand. AMD is the David of both the computer processing unit (CPU) and graphics processing unit (GPU) worlds. This David is fighting two Goliaths – Intel in the CPU world, and Nvidia in the GPU world.
For a long time, Intel and Nvidia were kicking AMD’s butt. But, AMD has punched back over the past several quarters with faster innovation, a promising product line-up, and aggressive expansion into new markets.
The result? AMD has won share from both Intel and Nvidia, and this share expansion has powered robust revenue growth, margin expansion, and profit growth.
Click to Enlarge
As this market share expansion narrative has gained momentum over the past several quarters, AMD stock has formed a healthy and steady uptrend. See the attached chart.
The stock has been very volatile. It has both spiked way above its multi-quarter trend-line, as well as dropped way below it. But, every time, it returns to that trend-line, which has a healthy upward slope.
That’s a promising sign for investors. It means that while there’s a lot of noise in AMD stock, the core growth narrative remains healthy and the core uptrend in AMD stock remains equally healthy.
The Uptrend Should Persist, with Some Friction
This uptrend in AMD stock should persist for the foreseeable future.
There are three things at play here. First, you have the aforementioned core market share expansion narrative. AMD needs that narrative to stay alive and well in order for the stock to preserve its uptrend. Fortunately, recent developments imply this is the case.
The company reported strong first-quarter numbers (on the heels of bad first quarter numbers from Intel), announced an impressive 7nm product road map which analysts say lays the groundwork for further market-share expansion, won a graphics licensing deal with Samsung, and has scored multiple cloud gaming deals. Thus, AMD should continue to win market share over the next several quarters.
Second, the market and economic backdrop need to remain healthy in order for AMD stock to stay on an uptrend. The outlook on that front is similarly favorable. Global economic conditions are improving, thanks to continued labor market strength, cooling U.S.-China trade tensions, and persistently low rates.
At the same time, low rates also create favorable market conditions, since they help inflate equity valuations. As such, the market and economic backdrops project to remain healthy.
Third, the valuation on AMD stock can’t get too far ahead of itself. Right now, it isn’t. My 2019 target on this stock has long been $30. But, in a bull case scenario, a $35 price target by the end of 2019 is supported, assuming the company can do somewhere around $2.75 in EPS by fiscal 2025 (which is within reason and entirely doable).
Broadly, then, AMD checks off all the boxes it needs to in order for the stock to stay on its healthy uptrend. The implication? AMD stock should stay in rally mode, with some friction as valuation becomes more worrisome the higher the stock goes.
Bottom Line on AMD Stock
AMD stock has been one of the market’s hottest stocks for the past 18 months. It won’t stay this hot forever.
Valuation will ultimately limit AMD stock from rallying another 80% over the next six months. But, the stock should remain on an uptrend so long as the company continues to expand market share, the economic and market backdrops remain healthy, and the valuation remains reasonable.
Right now, all three of those things are true. Thus, for the foreseeable future, AMD stock should stay on an uptrend.
As of this writing, Luke Lango was long INTC and NVDA.
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