Advanced Micro Devices (NASDAQ:AMD) stock has held its own in choppy waters over the past month, outperforming both the stock market and other semiconductor names by a wide margin. Since the start of May, the S&P 500 has dropped more than 5%, and the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is off more than 15%.
Over that same stretch, AMD stock has actually risen more than 5%.
Why did AMD stock outperform by such a wide margin during the May market rout? A few fundamental catalysts emerged in May, which showed that AMD’s non-cyclical market share expansion outlook remains intact. Investors continued to rally behind that outlook, ignoring trade-war worries, causing AMD stock to drift higher.
Will this upturn of AMD stock continue?
In the long-run, yes. AMD’s market-share expansion will persist for the foreseeable future, and as long as it does, AMD stock can remain well-positioned to reach $50 over the next few years. But in the short-run, the rally in AMD stock will likely be short-circuited yet again around the $30 level.
That $30 level is a critical area which the stock hasn’t consistently ever held. Long-term growth fundamentals imply that a move over $30 by Advanced Micro Devices stock won’t be justified until the end of the year. As a result, while AMD stock will eventually take out the critical $30 level, it won’t do so anytime soon.
AMD’s Growth Outlook Remains Healthy
The long-term growth outlook of AMD has been, still is, and will remain for the foreseeable future healthy enough to move Advanced Micro Devices stock higher in a multi-year window.
In a nutshell, AMD is the David of both the computer processing unit (CPU) and graphics processing unit (GPU) worlds. This David is fighting two Goliaths. In the CPU world, the Goliath is Intel (NASDAQ:INTC), which has dominated the PC market for many years, and is now paralleling that dominance in the data center market. Meanwhile, in the GPU world, the Goliath is Nvidia (NASDAQ:NVDA), the graphics chip giant that has dominated the gaming market and is now dominating the artificial intelligence (AI) market.
But David is finally putting up a fight against and winning share from Goliath, on both the CPU and GPU fronts, due to its faster innovation, promising product lineup, and expansion into new markets. As a result, AMD has generated healthy revenue growth, margin expansion, and profit growth over the past several years, pushing AMD stock considerably higher.
In May, investors got confirmation that AMD’s market-share expansion remains as vigorous as ever. 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 said lays the groundwork for further market-share expansion, and won a graphics licensing deal with Samsung.
Overall, AMD continues to win share from both Intel and Nvidia. Ultimately, that means its revenues, margins, and profits remain on track to move considerably higher over the next several years. That strong growth will power AMD stock higher.
The Rally May Face Turbulence at $30
Although AMD stock will head higher over the long-term, the rally may be short-circuited in the near-term at the $30 level.
The semiconductor market historically alternates between booms and busts. The past several years have been a boom period. This year, due to escalating trade tensions, oversupply, and falling demand, the sector is in bust mode. Non-cyclical tailwinds should produce another boom period after the current bust ends. But, until 2024, the revenue growth of the semiconductor market will be moderate, averaging in the low-single digit-percentage range.
AMD, however, will gain a larger share of that market. Further, AMD has exposure to the market’s most important growth areas, including data centers. As a result, its revenue should rise at a fairly steady rate of about 15% over the next several years.
Alongside that healthy revenue growth, its gross margins should increase as AMD expands into more lucrative markets with higher-margin products. As its revenues grow, its expense rates should fall, too. Thus, its net profit margins should benefit from a double tailwind of expanding gross margins and falling expense rates.
All together, AMD’s profits look poised to increase 20%-plus over the next several years. I’m looking at $2.40 as a realistic earnings per share target for this company by 2025.
Based on a forward price-earnings multiple of 20, which is average for growth stocks, that equates to a fiscal 2024 price target for AMD stock of $48. Discounted back by 10% per year, that results in a 2019 price target of right around $30.
The Bottom Line on AMD Stock
AMD’s growth outlook remains healthy. Investors received confirmation of its healthy growth in May. That’s why AMD stock outperformed during last month’s market downturn.
While AMD stock should head higher in the long-run, the rally will likely be short-circuited in the near-term by valuation concerns at the $30 level. Quite simply, those levels aren’t supported by the fundamentals just yet.
As a result, investors should sell AMD stock as it closes in on $30, and buy it back on the next dip.
As of this writing, Luke Lango was long INTC.
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