AMD: Focus on the Long-Term


The market is in panic mode from the coronavirus spread, but Advanced Micro Devices (AMD) just outlined a very attractive long-term financial model. As the health crisis dissipates in the next weeks and months, the chip stock has a very appealing path to strong revenue growth and margin expansion.

Large Market Opportunity

AMD forecast revenues reaching $8.7 billion in 2020. While the market likes the forecast for nearly 30% revenue growth this year, the company still only has a small market share of a global market with an estimated annual value of $79 billion.

The company estimates the data center market will top $35 billion next year with the PC segment reaching $32 billion. Even the gaming segment will reach $12 billion.

Oversll, AMD is only forecasting revenues equivalent to 11% of the market potential. For the chip company to reach just 25% market shares, annual revenues would need to soar to nearly $20 billion. The gap between the current total revenue and the market opportunity is why the stock is so appealing.

Updated Financial Model

Last week, AMD held their Financial Analyst Day 2020. At the event, the chip maker updated their long-term financial model.

The company issued long-term guidance for the market back in early 2017 to provide investors with confidence AMD would actually turn revenue growth into a profitable bottom line. At the time, the market feared the company would struggle to raise margins while competing against the industry giant in Intel.

The original guidance provided for an EPS target of greater than $0.75 and analysts now have AMD topping $1 this year before any coronavirus impact hits, if at all. The new guidance has the company easily soaring past this target by 2023.

(Source: AMD website)

The company has a new target of 20% annual revenue growth and gross margins exceeding 50%. The new target outlined above works out to the following financial targets for 2023:

  • Revenue – $15.0 billion
  • Gross profit – $7.5 billion (50% gross margins)
  • Operating income – $3.75 billion (25% operating margins)
  • Taxes – $0.56 billion (15% tax rate)
  • EPS – $2.66 (1.2 billion shares outstanding)

Despite what some investors view as an expensive stock as AMD trades at nearly 40x 2020 EPS estimates, the stock quickly becomes a bargain in out years. The company doesn’t even reach 25% market share in their target markets while pushing EPS up to $2.66 in 2023. Not to mention, these numbers are more a base case with both revenues and gross margins having upside potential from these levels.

Consensus Verdict

The chip giant has Wall Street almost evenly split between the bulls and those choosing to play it safe. Based on 27 analysts tracked in the last 3 months, 13 rate a Buy on AMD stock, while 14 recommend Hold. Meanwhile, the 12-month average price target stands at $53.20, marking a nearly 22% in return potential for the stock. (See AMD stock analysis on TipRanks)

Takeaway

The key investor takeaway is that the market is in panic mode, but the coronavirus isn’t going to change the long-term growth trajectory of AMD. The company suggested limited impacts to their supply chain from the virus, but investors should expect some short-term impact to sales.

Ultimately, AMD will benefit from global growth drivers of more data center demand and targets for substantial revenue growth over the next few years. As always, Intel remains a major threat, but AMD has a long-term plan to reward shareholders.

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