As the market starts to recover from the coronavirus panic, Advanced Micro Devices (AMD) has seen the stock hold up well. Other companies in the tech sector continue to report solid numbers due to high demand from people working from home and a surge in demand for virtual learning. The chip giant remains well positioned for a new world demanding additional data center space.
As 5-star analyst Jim Kelleher puts it, “The shelter at home movement has caused an on-the-fly effort to upgrade home networks […] Historically, periods of severe stock-market turbulence have proven to be good times for careful and disciplined stock selection, with a focus on the highest-quality and financially strongest names. AMD has relatively outperformed peers and the market in the broad market turndown, but is still down year to-date and is well below mid-February peaks.” Kelleher rates AMD shares a Buy along with a $60 price target. (To watch Kelleher’s track record, click here)
Companies form Zoom Video to Teladoc Health have seen a huge boost in demand from workers or patients connecting with the world from home. People that use to travel for meetings or doctor visits are now using computers and smartphones to make video connections to avoid contracting the COVID-19 virus.
These services need additional data center space in order to handle the surge in demand. Zoom Video has seen daily users surge from only 10 million back in December to 200 million recently. Even Pinterest has seen a surge in engagement while the ad business is struggling. The key here is the social media space will have to spend more on data centers in order to keep up with demand regardless of the ad business.
The end result is huge boost in demand for data center chips from the likes of AMD and market leader Intel. Even Samsung just reported that Q1 results beat estimates in a sign that demand held up well. The semiconductor company was the first to indicate the trends in data center space were positive.
Data Center Future
The whole key to the AMD story is the projected growth in the data center space. Their new EPYC 2 chip is a leader in the server space with Intel struggling to get new 10nm chips on the market for several years now.
AMD forecasted that the data center space only accounted for 15% of 2019 revenues of $6.7 billion. The space is forecasted at topping 30% of sales in 2023.
This matters to the stock for multiple reasons. First, the data center space is huge and was already predicted to reach $35 billion in 2023. Second, the EPYC 2 chips have margins far above 50% providing upside to a business only producing 43% gross margins now.
Higher demand and a market share boost in the data center space is what generates substantial gains in operating income and EPS. In order to double revenues by 2023 to $15.0 billion, AMD needs the data center sales to jump from around $1.0 billion in 2019 to something above $4.5 billion.
The key investor takeaway is that as panic subsides and signs emerge of strong demand in the chip space, AMD could easily rally back to previous highs near $60. The company is poised to see substantial EPS growth in the next few years and the huge demand for data center space should help the chip company meet estimates. Most importantly, the company will benefit whether the global economy returns to normal activities or demand moves online and into the homes providing a boost to data center demand where AMD is position to serve up their new 7nm chips.
When looking at Wall Street’s stance, TipRanks analytics showcase AMD as a Buy. Out of 27 analysts polled in the last 3 months, 14 say “buy,” 12 suggest “hold,” while only 1 recommends Sell. (See AMD stock analysis on TipRanks)
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