Advanced Micro Devices (NASDAQ:AMD) stock has been in resurgent mode over the past couple of months, rising close to 25% since the middle of May. Shares of the chipmaker seem to be finally putting disappointed investors at ease after underperforming for almost the entire first half of 2021.
But AMD’s recent rally has made the stock more expensive. It is now trading at 37 times trailing earnings, which is significantly higher than the multiple it was trading at in the middle of May. Once AMD releases its second-quarter 2021 earnings report at the end of July, that multiple is likely to head higher and make the stock more expensive. Let’s see why that may be the case.
AMD usually steps on the gas in the second half
According to AMD’s estimates, it should report second-quarter revenue of $3.6 billion at the midpoint of its guidance range. That would translate into a whopping year-over-year increase of 86%. The company also anticipates an adjusted gross margin of 47% for Q2, which would be a gain of three percentage points over the prior-year period’s figure of 44%. Not surprisingly, Wall Street expects AMD’s earnings to triple year over year to $0.54 per share in the second quarter.
AMD had pointed out in its first-quarter earnings release in April that the “year-over-year increase is expected to be driven by growth in all businesses.” That growth can only be expected to get stronger in the second half of the year and give AMD’s stock price a nice shot in the arm.
For instance, $6.04 billion of AMD’s total 2020 revenue of $9.76 billion came in the second half of the year. So, the last six months of 2020 produced nearly two-thirds of AMD’s total revenue. A similar trend was seen in 2019 as well. AMD generated $3.93 billion in revenue in the final six months of the year out of its total revenue of $6.73 billion, which means 58% of the top line came in the second half.
What’s more, AMD’s stock price also follows suit and goes supersonic in the second half of the year. Here’s the 2020 stock price chart illustrating the same.
In 2019 as well, AMD stock rallied hard in the second half of the year.
Now, it is absolutely correct that past performances aren’t an indicator of the future, but there are stark resemblances between the second halves of 2019, 2020, and this year.
AMD’s Ryzen CPUs set sales on fire in 2019, especially during the holiday period, thanks to their technological and price advantage over Intel. AMD ended the fourth quarter of 2019 with its “highest quarterly client processor unit shipments in more than six years,” driven by strong demand across both laptops and desktops. Additionally, the number of platforms using AMD’s EPYC server processors had doubled in the final quarter that year.
In the second half of 2020, AMD’s growth in client and server CPUs was supported by the arrival of a new catalyst in the form of gaming consoles. While AMD’s new Ryzen processors turned up the heat in the second half of the year, the terrific demand for the next-generation consoles led to a faster ramp-up in semi-custom chip sales as compared to the previous console cycle. The server business, meanwhile, turned in another record-breaking quarter at the end of 2020 as AMD finished the year with over 200 cloud platforms powered by its chips, which was double as compared to the prior-year period.
Don’t be surprised to see a similar trend unfold in 2021 as AMD is sitting on similar catalysts that are likely to send sales soaring.
Why history may repeat itself
AMD has already given us signs of a sizzling second-half financial performance when it upgraded its guidance in April. The company had bumped its full-year revenue growth guidance to 50% from its initial expectation of 37% growth, citing strength across all its business lines. It won’t be surprising to see AMD increase its guidance once again when it releases its second-quarter earnings, as the demand for products powered by its chips isn’t showing signs of slowing down.
The enterprise, embedded and semi-custom (EESC) segment, which moved the needle in a big way for AMD in Q1 with 286% year-over-year growth to $1.35 billion, looks all set to sustain its amazing momentum. That’s because this segment caters to two rapidly growing areas — gaming consoles and server processors.
AMD’s chips power Sony‘s (NYSE:SONY) hugely popular PlayStation 5 console, as well as Microsoft‘s new Xbox models. The good news for AMD is that both companies are witnessing terrific demand for their gaming consoles, which they have been unable to keep up with. Sony, for instance, expects the PS5 to help it break a 24-year sales record in fiscal 2023 (ending on March 31, 2023) with shipments of 22.6 million units. Sony aims to sell 14.8 million PS5 units in the current fiscal year that ends in March 2022.
On the other hand, the demand for AMD’s server central processing units (CPUs) can keep improving thanks to the technological advantage it enjoys over Intel. AMD’s server prospects recently jumped when it emerged that Alphabet‘s Google Cloud is tapping the chipmaker’s EPYC server chips to launch new services. Throw in the fact that Intel has been struck by delays once again in the server CPU market, with its 10-nanometer Sapphire Rapids chips delayed to 2022, and it won’t be surprising to see AMD take away more share from its biggest rival.
Meanwhile, AMD’s computing and graphics segment, which recorded 46% year-over-year growth in Q1 to $2.1 billion thanks to solid demand for Ryzen notebook and desktop CPUs and Radeon graphics cards, is also firing on all cylinders. AMD CEO Lisa Su recently pointed out that the demand for Ryzen CPUs continues to be stronger than supply despite the company’s efforts to increase supply each quarter.
In all, AMD’s revenue, earnings, and stock price could take off in the second half of 2021 and beyond. Now is a great time to buy this growth stock as its price-to-earnings ratio of 37 represents a significant discount to AMD’s expensive five-year average multiple of 122. Also, with analysts anticipating annual earnings growth of 32% for the next five years, AMD stock could prove to be a solid long-term bet at its current valuation.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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