Shares of Advanced Micro Devices (NASDAQ:AMD) have been on fire for the past four years, a stretch in which AMD stock has risen over 1,600%. To put that number into context, consider this: The S&P 500 is broadly considered the most important index in the stock market. In 2018, AMD was the S&P 500’s top performing stock. So far in 2019, AMD is one of the S&P 500’s top 20 performing stocks. Had AMD been in the S&P 500 back in 2016, it would’ve been the top stock in that year, too.
That’s pretty impressive. Step back and think about it. Of the 500 most important stocks in the world, AMD has distinguished itself as the single top performer twice in four tries — 50% of the time — and as one of the top performers three times.
Naturally, the question now is — how much longer can AMD stock stay this hot?
The answer: for a little while longer … at least. At the current moment, AMD stock is all about market share, and AMD continues to expand market share at a rapid rate. So long as they keep doing this, AMD stock will keep running higher. That is especially true with the stock sitting below $30 today — a level which leaves plenty of room for fundamentally driven upside over the next few months.
The investment implication? Buy AMD stock below $30.
AMD Stock Is on a Winning Trajectory
Take one look at AMD stock, and it’s easy to tell that AMD has been on a big winning trajectory for several years. After all, a 1,600%-plus rally doesn’t just happen out of the blue. It happens because a company is firing on all cylinders.
AMD has been and still is firing on all cylinders. Long story short, AMD has long been the David in the CPU and GPU markets, to the Goliaths of Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). But, AMD has leveraged ahead-of-the-curve technology to launch next-gen chips before the competition, which has allowed AMD to win market share from Intel and Nvidia over the past several years. AMD’s desktop market share has essentially doubled since 2016, server market share has tripled since 2017, and mobile market share has almost doubled since 2018.
This rampant market share expansion has driven consistent robust revenue growth, margin expansion, and profit growth — the sum of which has driven huge gains in AMD stock.
This is all set to continue going forward. AMD’s next-generation 7nm chips are just coming to market, and Intel has no response for them. The current timeline for Intel to launch its own 7nm chips is in 2021. That gives AMD another 12-plus month window to expand market share by even more.
If that happens, and it should, given that AMD still has a technology advantage over peers, then AMD will continue to report robust revenue growth, margin expansion, and profit growth. Just as it has over the past several years, all that growth should continue to power big gains in AMD stock over the next several years, too.
Advanced Micro Devices Stock Looks Good Below $30
My numbers suggest that AMD stock looks attractively undervalued below $30 in late 2019.
Those numbers are pretty easy to follow. According to the Semiconductor Industry Association, global semiconductor sales have been on a largely healthy uptrend over the past twenty years, rising at a compounded annual growth rate of roughly 5% during that stretch. There have been bumps in the road — like the trade-inspired slowdown we are seeing in 2019 — but such hiccups are short-lived, and are always followed by more growth since secular trends underpin broader global adoption of semiconductor technology.
Assuming this market follows its historical 20-year trend line over the next several years, then global semi sales should come to just over $490 billion by 2025. In that market, AMD’s market share in 2018 hovered around 1.4%. It is expected to hit 1.6% in 2019, and has peaked above 2.5% twice before over the past twenty years.
Current trends indicate that AMD’s market share should rise back towards 2.5%, and potentially even above it as the company gains share in critical growth markets like data center and IoT. A reasonable estimate for AMD’s 2025 semiconductor market share is 3%. At that share, you are talking around $15 billion in revenues for AMD by 2025.
At that time, gross margins should trend higher thanks to entry into higher-margin end-markets, while big revenue growth should drive steady positive operating leverage. That combination makes 25% operating margins seem achievable. That margin profile on nearly $15 billion in revenues reasonably leads to about $2.70 in 2025 projected EPS.
Based on a growth stock average 20-times forward earnings multiple and 10% discount rate, that equates to a 2019 price target for AMD stock of over $33. Thus, below $30 in the last few months of 2019, AMD stock seems attractively undervalued.
Bottom Line on AMD Stock
AMD is on a long-term winning trajectory, and while still on that winning trajectory, AMD stock has dropped into attractively undervalued territory. The investment implication, then, is simple. Buy AMD stock while it’s on sale.
As of this writing, Luke Lango was long AMD, INTC, and NVDA.