Something’s Got to Give With AMD Stock
Advanced Micro Devices (NASDAQ:AMD) reported reasonably strong third-quarter results on Oct. 29. Yet, AMD stock initially fell on the news only to recover by the next day’s close.
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CEO Lisa Su continues to be enthusiastic about the chipmaker’s progress to becoming a major player in the chip space. Even though its Q4 2019 guidance was only in-line with analyst expectations, she sees 2020 being an outstanding year for the company.
Advances Micro Devices Stock Gaining Market Share
“We’re gaining share and market share in our world is very very important. We’re seeing much more adoption across both consumer and commercial channels. So we’re very excited about not just what we’ve done in 2019, but looking forward into 2020 and beyond,” Su told Fortune’s Susie Gharib.
She went on to say 2020 was going to be a big year for consoles — Microsoft’s (NASDAQ:MSFT) bringing out a new Xbox in 2020; Sony’s (NYSE:SNE) doing the same with the Playstation — and it will continue to bring out great products customers want to use.
Su, in my opinion, is one of the best CEOs in America. In August, unfounded rumors made the rounds suggesting she would bolt to IBM (NYSE:IBM) to patiently wait for Ginni Rometty to retire. From Su’s conversation with Gharib, it appears owners of Advanced Micro Devices stock can rest easy.
Su has her eyes on a 10-year run as the company’s CEO. That alone should give the AMD stock price a boost despite a relatively nosebleed valuation. Where does it go from here?
Analysts Generally Like AMD Stock
A total of 38 analysts cover AMD, according to the Wall Street Journal. The cohort of 38 gives it the following ratings: Buy (14), Overweight (1), Hold (20), Underweight (1), and Sell (2).
Over the past three months, AMD has gained three buy ratings, two holds, and lost one sell call. Overall, analysts continue to warm up to the stock despite price-to-sales and forward price-to-earnings ratios of 6.4x and 31.5x, respectively.
According to FactSet, six analysts raised their price targets for AMD, including Nomura/Instinet analyst David Wong, who upped his price target by $3 to $40. The average target is now $34.20, providing a 3% upside over the next 12 months.
While AMD’s Q3 2019 report wasn’t perfect by any means, it still plans to deliver $6.7 billion in revenue in fiscal 2019 — $2.1 billion estimated sales in Q4 plus $4.6 billion in the first nine months — 26% higher than in fiscal 2018.
“We anticipate a gross margin long-term target raise for 2020. We view the Q3 results as a non-event considering that they were largely in-line,” stated RBC Capital Markets, who’ve got an outperform rating on the stock and a $44 target price.
“Going forward, we continue to look for: 1) [market] share gains in x86 moving to 10% over the next 2-3 quarters; 2) gross margins working to 45%+; 3) improving console business in second half 2020 after weaker results due to a product refresh cycle in 2019, and 4) notable operating margin leverage on mix shift toward servers.”
That’s not bad considering it’s got some tough competitors in Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA), who combined, have trailing 12-month free cash flow of $17.2 billion.
The Bottom Line on AMD Stock
It would seem, given Su’s enthusiasm for the year ahead along with empirical evidence that it’s taking market share, that AMD’s target would be closer to RBC Capital Markets’ $44 target, not $10 lower at $34.
In my mind, something’s got to give. I believe it will be the analysts’ target price. Expect more of the buys to up their target prices in the coming days and weeks.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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