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Tech stocks have pulled back in recent months from their historic first-half rally, which was fueled in large part by investor enthusiasm over the growth prospects for artificial intelligence (AI), but the Nasdaq Composite ($NASX) is still up more than 27% for 2023.
Notably, semiconductor chips remain a critical component that underlies any stable AI system. In fact, according to a report by the Semiconductor Industry Association, total sales from the semiconductor industry could reach $1 trillion by 2030, up from $574.1 billion in 2022 - representing a CAGR of 7.2%.
Unsurprisingly, stocks in this industry have been on a tear amid this year's AI optimism. Top semiconductor funds like the iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH) are up 37.4% and 44.6% on a YTD basis, respectively - outperforming the broader Nasdaq's rise by a considerable margin.
Among this group, semiconductor giant Advanced Micro Devices (AMD), more popularly known as AMD, stands out as a strong long-term pick amid the recent pullback. Here's what you need to know about AMD, and three reasons why the stock is a strong buy right now.
About AMD
Founded in 1969 and headquartered in Santa Clara, Calif., AMD is a behemoth of the semiconductor industry, commanding a market cap of $173.26 billion. The company is one of the world's largest suppliers of microprocessors and related technologies for the computing and graphics industries. AMD's products are used in a wide range of applications, including personal computers, servers, workstations, embedded systems, and gaming consoles.
AMD has had a stellar performance on the charts in 2023, gaining 63% on a YTD basis. That outperforms not only the broader tech sector and industry-specific ETFs like SMH and SOXX, but also rival chip stocks like Broadcom (AVGO), Taiwan Semiconductor (TSM) and Intel (INTC).
However, with AMD off about 20% from its summertime highs, here's why it's an opportune time to scoop up this standout semiconductor stock on the dip.
1. Positive Earnings Performance
With investor expectations set extremely high for AI-related chip stocks heading into second-quarter earnings season, AMD fell after reporting results - despite beating Wall Street's top-line and bottom-line estimates.
Specifically, net revenues for the quarter came in at $5.36 billion, down 18.2% from the prior year, while EPS declined 45% to $0.58. Analysts, meanwhile, were looking for revenue of $5.31 billion on EPS of $0.57.
Also, AMD reduced its long-term debt to $1.7 billion from $2.5 billion at the start of the year. This is encouraging, as amid a “higher for longer” interest rate environment, a reduction in debt should ease the interest burden on the company and support its profitability.
However, AMD shares sold off on heavy volume after earnings, as investors reacted to the company's softer-than-expected third-quarter guidance. The shares have shed about 10% in total since the date of that earnings report - which suggests potential third-quarter weakness may be adequately priced in at current levels.
Analysts expect the company to report an earnings decline of 9.3% for the current quarter, but AMD is expected to bounce back to 29.6% EPS growth in the final quarter of the fiscal year.
2. Impressive Growth Prospects
Among tech stocks, AMD stands out as a top growth pick. Forward revenue growth is pegged at 18.47%, nearly doubling the sector median. Likewise, forward EBITDA growth of 15.11% easily tops the sector median of 8.06%.
Looking even further out, forward long-term EPS growth stands at 30.65% - outpacing not only AMD's own 5-year average of 28.38%, but absolutely crushing the sector median of 13%.
These growth forecasts should be supported by new launches and innovations. Notably, to narrow the gap with Nvidia (NVDA) - the undisputed leader in the $1.3 trillion generative AI market - AMD recently introduced its most powerful GPU to date, the MI300X, made specifically for generative AI.
Another cause for optimism is AMD's dominant position in the gaming console processors market, with an 83% share. Notably, it is the exclusive chip supplier for Sony's PlayStation 5 and Microsoft's Xbox Series X|S, and it reported sequential revenue growth from the gaming segment in the latest quarter.
Lastly, the company's commanding status in the high-performance computing market has also brightened its growth prospects. With over 640 EPYC processors operational presently and another 200 to be added by the end of 2023, demand appears to be strong - as indicated by adoption among large corporations like Banco do Brasil (BDORY), BNP Paribas (BNPQY), and Uber (UBER) in Q2 2023.
3. Analysts See Plenty of Upside Ahead
Analysts are upbeat about the outlook for AMD's stock, with an average “Strong Buy” rating and a mean target price of $141.03. This indicates an expected upside potential of about 33% from current levels.
Out of 28 analysts covering the stock, 21 have a “Strong Buy” rating, 1 has a “Moderate Buy” and 6 have a “Hold” rating.
