AMD Remains A Good Investment As The Semiconductor Industry Struggles (NASDAQ:AMD)

Advanced Micro Devices, Inc. (NASDAQ:AMD), unlike its main rival Nvidia Corporation (NVDA), in my opinion, has a far stronger revenue model, to weather the current economic outlook. AMD has been far less exposed to the current economic cycle than some of the other semiconductor companies, mainly owing to its business model being a lot more hedged among different industries, compared to its rivals. They have been caught in a downturn, mainly on the back of an increasing number of crypto mining operations failing.

Meanwhile, AMD’s operations are a lot more spaced out across desktop, PC, and data centers. AMD has planned a number of key launches in 2023, including its Ryzen 7000 series processors which have been hotly anticipated. While the PC industry is increasingly under pressure, the latest TSMC 5nm process on which the chip runs is going to likely bring in demand. The introduction of the new series should help continue to bring on marginal buyers across segments, including gaming, and everyday PC users. The combination of the chips being both powerful and affordable makes it a lot more attractive to the end user. The initial model starts at $299 and has a clock speed of 4.7/5.3 GHz, with the next model starting at $399, with a clock speed of 4.5/5.4 GHz.

What’s interesting is that not soon after the release of AMD’s Ryzen, Intel (INTC) is set to launch its own set of CPU processors, known as Raptor Lake, which is as competitive. Users will get to choose between the two. In order to prepare for the competition from Intel, AMD has made an effort to ensure that its processors remain competitive in terms of price. But, while Raptor Lake has shown at times to have overall better performance at similar prices, Intel has continued to increase its prices recently, setting up for an interesting clash.

Regardless, AMD is not overly reliant on the PC market and has been facing an increasing demand for its EPYC chips, which continue to gain market share in the growing market of data centers. This means that, despite the slowdown in the broader economy, AMD’s revenue has continued to grow at a relatively rapid pace, with the latest quarter witnessing a 29% growth YoY.

Traders continue to remain bullish on AMD stock despite the global headwinds stemming from a semiconductor glut, which has affected prices. But with both historical volatility falling over the past year, it’s the outlook seems to be more certain than not, making the risk-reward quite attractive.

Meanwhile, the AMD put-to-call ratio has been steadily trending downwards and is now firmly in favor of the bulls, who clearly believe that AMD stock may have been oversold. This oversold sentiment is clearly reflected in how options are positioning themselves, further indicating that a bull run might be on the horizon.

Financial Outlook

The current financial outlook for AMD remains strong, with the average analyst expecting around $5.55 billion in the next quarter, although with AMD’s history of beating estimates the actual number could be higher. This means that AMD’s revenue in 2022 could come in around $22-23 billion, but will likely grow by another 8-10 percent in 2023, as the market continues to remain weak, especially for PC sales, which have hit multi-year lows. Should data center revenue continue to remain on a strong footing, that increase could be closer to around 15%, and that would mean – unless there is any major contraction in the margins – that the valuation for AMD will be relatively low compared to the last 5 years

Taking A Closer Look At Servers

The sale of EPYC servers is the biggest source of demand, and the current data center industry is most likely going to remain the biggest contributor in AMD’s earnings next year, as other sources of demand, mainly gaming and PC sales, are likely to continue to falter. The total market value of the industry is currently on track for $200 billion by 2023, and that provides plenty of opportunity for AMD. Competition remains strong, and the recent announcement of Sapphire Rapids by Intel is unlikely to translate into any major gains in terms of market share for Intel. During the previous quarter, figures showed a continued preference for AMD and a gain of 45% in the most recent quarter. It remains to be seen whether the latest launch of data center processors by Intel can compete with the likes of AMD’s EPYC processors. Intel’s latest product features improved performance and efficiency, but the overall package by AMD still remains ahead.

China Reopening

One of the biggest factors that will help mitigate some of the demand slowing for AMD globally is the fact that China is reopening. This should provide a boost to its EPYC and overall sales. China has been out of the game for a while, and this creates opportunity in both the data center industry and the CPU industry, with PC sales and gaming demand driving demand for AMD’s products. While AI chips are increasingly under pressure and have been effectively banned, the reopening will still mean a bumper for a couple of quarters for AMD. With this bumper, AMD will likely beat analyst expectations, as Chinese tech companies, which have been on the back foot, will look to reinvest in their infrastructure to get their cloud operations back in line with global competition.

Downside Risk To AMD’s Stock

There is very little indication that the coming quarter is likely to see any major surprises to the downside in terms of revenue. The market is already forecasting relatively conservative revenue, and this, combined with the fact that the company is already trading at a valuation that is modest, means that AMD stock is unlikely to see a significant downside. But if a surprise does come over the next quarter, it is likely that stock could fall to around the $60 level, but at the moment nothing on the horizon seems to indicate any significant or long-term losses. Should AMD beat expectations, it’s likely that the stock will continue to head back up to $70-80 levels in the mid-term.

Advanced Micro Devices, Inc. remains resilient despite the fact that there are numerous headwinds affecting revenue, headwinds that mainly stem from the fact that demand is waning, and has been waning for a while. There is the further expectation of a slowdown in 2023, with the semiconductor industry expected to either be flat or decline slightly. Despite this, Advanced Micro Devices, Inc. repeatedly has beaten most expectations, and AMD stock could be heading up again.