Shares of central processing unit (CPU) and graphics processing unit (GPU) maker Advanced Micro Devices (NASDAQ:AMD) have been on fire for several years, thanks to the reality that this once small company is turning into a force to be reckoned with in the huge global semiconductor market.
It all started in 2016, when Advanced Micro Devices stock rose nearly 300% as the company went from being on the verge of bankruptcy to growing rapidly with a refreshed portfolio of CPUs and GPUs. After a quiet 2017, AMD stock rose another 80% in 2018, as the company’s refreshed product portfolio began to steal market share from CPU and GPU market incumbents Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
Now, in 2019, Advanced Micro Devices stock is up yet another 110%. The driver? You guessed it. Sustained share gains in the CPU and GPU markets. Since early 2016, AMD stock has rallied an absurd 1,240%.
Can shares stay hot in 2020? Yes. But, not as hot as they were in 2018 or 2019. My numbers indicate that improving semiconductor market fundamentals and sustained market share gains will propel Advanced Micro Devices stock 10% higher in 2020. Thus, while AMD stock can and will head higher in 2020, the days of 100%-plus annual gains seem to be over.
The Fundamentals Continue to Improve
The core fundamentals underlying Advanced Micro Devices stock continue to improve, and these improving fundamentals lay the groundwork for continued share price gains.
First, the global semiconductor market is well positioned for a big rebound in 2020. Since early 2018, escalating trade tensions between the U.S. and China have weighed on global semiconductor demand and sales. But, those escalating trade tensions are now de-escalating, and should continue to de-escalate into 2020. As they do, semiconductor demand and sales will rebound. Of note, helping this rebound will be a huge commercial 5G push in 2020, the introduction of cloud gaming and the rollout of several streaming TV services.
Second, Advanced Micro Devices continues to gain share in that rebounding semiconductor market. Specifically, AMD is rolling out new 7-nanometer CPUs and GPUs left and right, while main competitor Intel won’t unveil its 7-nanometer products until 2021. That gives AMD another 12-plus month window of sustained market share expansion thanks to better-than-peer technology.
Third, Advanced Micro Devices stock continues to feature a small market capitalization relative to peers. GPU giant Nvidia is a $130 billion company. CPU giant Intel is a $243 billion company. AMD is a $45 billion company. Thus, so long as AMD continues to gain share against its $100 billion-plus peers, there remains a reasonable argument for Advanced Micro Devices stock to keep grinding higher.
Advanced Micro Devices Stock Can Take Out $40
The company’s long-term profit growth prospects support Advanced Micro Devices stock at $40 in 2020.
Here are the numbers. The global semiconductor market is a $400 billion-plus annual revenue market. AMD controls about 1.5% of that market. Historically speaking, the global semi market has grown sales at a 5% compounded annual growth rate. Over the next few years, sales should grow at a similar rate, given the market’s huge 5G, cloud and data drivers. Further, AMD should expand its share in the global semi market, given its better-than-peer technology.
Modeling that out, it seems reasonable to assume that AMD nabs about 3% share of a $500 billion global semiconductor market in 2025. That implies about $15 billion in sales, up about 14%-15% per year from 2019’s projected base. At the same time, gross margins should move higher thanks to expansion into higher-end markets. The operating expense rate should move lower thanks to positive operating leverage from sustained double-digit revenue growth on 10% expense growth.
AMD over the next few years will be characterized by 14%-15% revenue growth and sizable upside margin drivers. That will drive huge profit growth. Something like 30% profit growth to $3 in earnings per share by 2025.
Based on an information technology sector-average 20-times forward earnings multiple, that implies a 2024 price target for AMD stock of $60. Discounted back by 10% per year, that equates to a 2020 price target for Advanced Micro Devices stock of $41.
Bottom Line on AMD Stock
Sustained share expansion in a rebounding semiconductor market will power AMD stock higher in 2020. But, given how far AMD stock has already come since early 2016, stock price gains won’t be enormous from here. Instead, the days of 100%-plus annual gains are over, and the days of 10% annual gains are here.
As of this writing, Luke Lango was long AMD and INTC.