After topping out at $34 this past July and August, Advanced Micro Devices (NASDAQ:AMD) is holding up at the $30 level. Valuations continue to hamper AMD stock’s ascent. It will take a blow-out earnings report to finally put the bulls in full control.
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Even though AMD has the upper hand in the CPU market in both desktops and notebooks against Intel (NASDAQ:INTC), Intel shares are holding up. Intel recently rallied from a $46 low to trade at $52.54 at the end of last week. This suggests that markets believe Intel still enjoys strong prospects in the CPU markets. Yet AMD’s latest CPU refresh offers a highly competitive suite of products that could take Intel’s market share. It refreshed Ryzen to the third generation, offering seven-nanometer production chips at a higher price to performance over Intel’s products.
At the macroeconomic level, Intel may face weaker sales as the U.S.-China trade war persists. This will also hurt AMD sales in China. But a weak Q4 sales outlook for Intel will only give AMD market share gain. In 2020, AMD will have more original equipment manufacturers carrying Ryzen third-generation chips.
EPYC Server Demand
On the enterprise front, expect strong demand for AMD’s EPYC server chips. The company now claims 14 world records. On a Red Hat Enterprise Linux setup, testers achieved record speeds on several benchmarks. These results should impress information technology departments. So, as enterprises buy cloud-based solutions, they will demand EPYC-powered cloud solutions instead of using Intel’s chips.
Building Brand Awareness
AMD has a slew of upcoming webinars that will strengthen the company’s branding. It will also build support with its channel partners and developers. In September, the company will talk about its powerful mobile solutions in HP systems. At the end of the month, it will talk about the Ryzen 3800X system that is ideal for powering professional gaming and content creation.
AMD’s partner launches should lead to market share growth, assuming customers pick AMD chips over Intel ones. Last month, Asus announced a pair of ZenBooks that have Ryzen 5 3500U or Ryzen 7 3700U processors. The GPU will also have an AMD Radeon Vega.
AMD Stock’s Valuation
Wall Street analysts are modestly bullish on AMD stock. Of the 22 analysts offering a price target, the average price target is $33.17, 8% above its recent close of $30.70 (per TipRanks). Cautious investors may want to build their financial model to estimate the downside fair value on AMD stock. For example, in a five-year Discounted Cash Flow Exit model, investors might assume the trade war will hurt revenue growth. Should revenue fall to the single digits at any time over the next five years, the fair value of AMD is around $26. Conversely, a 20%-25% annual revenue growth rate would imply a fair value of $41.50 for AMD stock.
The Outlook for Advanced Micro Devices Stock
In the third quarter, AMD issued an outlook that was weaker than expected. Still, its product launches in the last month should reaccelerate its revenue growth. It launched the seven-nanometer EPYC Aug. 7 and custom Radeon RX 5700 XT GPUs later in August. A Threadripper third generation is on the way. And while these new products will not get counted in the upcoming earnings report, they will have a positive impact on its outlook in the quarters ahead.
AMD’s valuations are unfavorable at this time at the $30 range, but its prospects are bright. Investors will bid the stock higher as they realize the company achieves its revenue growth potential.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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