There is a lot of optimism in the market for Advanced Micro Devices (NASDAQ:AMD). Institutional investors scooped up 1.3% of AMD stock in the last 13-F cycle amidst substantial market volatility. A large part of it is because of its aggressive product road map, robust financials and competitive positioning.
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However, the bears are skeptical about AMD’s performance in the upcoming quarters due to supply chain disruptions. They question the performance of its foundry partners in these uncertain economic conditions. Additionally, bearish narratives also cover the potential impact of the closure of brick-and-mortar stores across the world, hurting offline sales.
The reality, though, is that the data does not support these bearish narratives and despite few hiccups, the second quarter will be in line with the analyst estimates. Let’s take a look at some of the reasons why I have a bullish take on AMD.
Baseless Bearish Narratives
Source: Muslim Farooque
The bears have gone off about the AMD’s potential pitfalls in the upcoming quarter, mainly due to its foundry partners. It’s true that the company is not vertically integrated and relies on different companies to provide many of its products, which include Gigabyte, Motorola Solutions (NYSE:MSI), ASRock, TUL and Taiwan Semiconductors (NYSE:TSM).
Tracking the latest figures for revenue growth for these companies will provide valuable insight into the health of AMD’s supply chain. The chart indicates that the majority of its partners have exhibited strong revenue growth in the past month. The only anomaly is TUL, which has struggled in generating sales for a long time.
These companies assemble and sell AMD GPU’s and also manufacture and sell consumer and enterprise products internationally. A lot of these companies are exclusive partners with AMD apart from TSM, which also works with its rival Nvidia (NASDAQ:NVDA).
Though supply chain disruptions have impacted AMD and its partners, overall, the performance of these companies has been solid and essentially nullifies the arguments presented by the bears.
Disappointing Recent Performance
AMD fell short of analyst estimates in the first quarter, but overall its trend remains intact at this point. The company revenues totaled $1.79 billion in the first quarter, while net income was $162 million. Though revenues beat Wall Street analyst estimates, EPS came in lower than the projected 18 cents per share.
Perhaps the most encouraging sign for the company is its gross margins, which hit an eight-year record 46% despite the lower sequential increase in sales. The numbers could be better, though, if the pandemic didn’t force a lockdown across different parts of the world.
AMD has revised its guidance for the year, pegging revenue estimates at 25-30% down from its original estimate of 28-30% for 2020. On the flip side, arch-rival Intel (NASDAQ:INTC) has pulled its guidance for the year.
The optimism surrounding the company is understandable for most industry insiders. AMD has benefited massively from the lockdown with the work-from-home and play-at-home trends. More people are using cloud services, which bolsters the demand for server chips. This is perhaps why sales of its Ryzen-powered notebooks have been on a tear off-late.
The company has also recently released its Ryzen 4000 mobile processors, which will help AMD in unlocking the full potential from mobile chips in the coming months. AMD’s computing and graphics segment revenues took a hit in the first quarter but are still up by an impressive 73% on a year-over-year basis.
Moreover, AMD expected to see a substantial turnaround in the growth of its semi-custom chip revenue in the latter half of the year with the release of the upcoming next-generation video-game consoles. Both the Sony PlayStation 5 and Microsoft Xbox Series X, use AMD’s Zen 2 CPU and a next-generation GPU architecture.
Furthermore, AMD also acquired a lucrative contract to supply its EPYC processors and Radeon Instinct GPUs to the Lawrence Livermore National Laboratories El Capitan supercomputer in 2023. El Capitan is expected to be the fastest supercomputer in the world.
Final Word on AMD Stock
Advanced Micro Devices is in a strong position to finish 2020 on a high. Its strong partner sales dispel any bearish narratives about its supply chain disruptions. The fact that it has not withdrawn its guidance for the year, unlike some of its competitors, is an encouraging sign which will only benefit AMD stock price going forward.
The stock price is currently in line with the mean estimates, but the significant volatility in the market could reduce consensus estimates. However, the reality is that with its upcoming launches in the pipeline, it will only push the stock at the higher end of the analyst estimates. Therefore, there is a significant upside to the stock and is definitely a great stock to own at this time.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.
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