AMD Stock Is a Bargain

Advanced Micro Devices AMD designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD is fabless—it outsources its chip manufacturing to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel INTC, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles. We think AMD is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, we expect it will gain share at Intel’s expense in the coming years.

Key Morningstar Metrics for AMD Stock

• Fair Value Estimate: $130
• Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Economic Moat Rating

We believe AMD possesses a narrow economic moat, consistent with other major fabless semiconductor peers. We think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise. AMD operates in the x86-based duopoly with Intel that dominates the PC and server markets and also serves as a major barrier to entry for other chipmakers to encroach upon AMD’s and Intel’s focus areas.

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Fair Value Estimate for AMD Stock

Our fair value estimate is $130 per share, which implies an adjusted price/earnings ratio of 35 times. We expect AMD to achieve a top-line compound annual growth rate of 19% through 2026, which includes the acquisition of Xilinx in 2022. We expect AMD to achieve organic revenue growth above 30% in 2022 as a result of new product growth and strong share gains against Intel. Xilinx is margin-accretive to AMD’s financials, and we think the company can maintain gross margins in the 50s going forward. We expect solid operating margin expansion, approaching 30% by 2026.

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Risk and Uncertainty

Our Morningstar Uncertainty Rating is High, as we incorporate the cyclical nature of the semiconductor industry coupled with AMD’s smaller scale. AMD has historically been at a disadvantage to Intel and Nvidia NVDA in terms of scale, in our view. Both peers are able to heavily outspend AMD in research and development, leading to further market share dominance. However, the democratization of manufacturing process technology (via the foundry and fabless business models) has provided both AMD and Nvidia access to advanced manufacturing. AMD’s recent share gains at Intel’s (and to a lesser extent Nvidia’s) expense have allowed the company to stabilize its balance sheet while increasing its ability to invest in future products.

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AMD Bulls Say

• AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products and utilize leading-edge process technologies.
• The company’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
• AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable with or even superior to certain Intel chips in many benchmark tests.

AMD Bears Say

• Intel remains the dominant player in the processor market and holds long-term advantages over AMD in aspects ranging from R&D and marketing to pricing.
• Nvidia is ahead of AMD in GPU technology and has also been incredibly successful leveraging its GPUs into adjacent end markets like artificial intelligence.
• AMD’s lack of size may make it difficult to sustain any momentum against the likes of Intel and Nvidia, which have considerably deeper pockets.

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