Advanced micro devices (NASDAQ: AMD) shows no signs of slowing down. The pawnbroker is driving several fast-growing technological trends that have surpassed revenue and earnings growth in recent quarters, and these catalysts will not disappear anytime soon.
In simple words, it seems that AMD is in the middle of a growth curve of several years. And if you have not bought this growth stock yet, it would be a great time to do so now. Let’s look at one of the biggest reasons why you should consider adding AMD to your stock portfolio.
AMD’s market share in CPU market share may be the biggest catalyst
AMD derives most of its revenue from the computing and graphics segment, where it sells its Ryzen central processing units (CPUs) and Radeon graphics processing units (GPUs). The segment’s revenues are directly related to the health of the PC market, as well as the data center area, where graphics cards are used to accelerate workloads.
AMD’s computing and graphics revenues increased by 65% from Q2 to $ 2.25 billion, compared to 58% of total revenues. The company credited this amazing growth to increases in average selling price (ASP) and shipments of Ryzen processors used in laptops and desktops. According to AMD, the revenue share in the client processor market has now improved for five consecutive quarters.
The company is witnessing strong demand for its advanced processors such as the Ryzen 9 series, which saw shipments more than double year over year. Meanwhile, AMD’s new Ryzen 5000 series of portable processors helped record a seventh consecutive quarter in record revenue in the mobile processor.
AMD benefits from a mix of higher volumes and stronger prices in the client processor market. This is not surprising, since the chipmaker has eaten away Intel‘s (NASDAQ: INTC) dominance in the CPU space. According to PC reference provider PassMark Software, AMD exited the second quarter with a CPU market share of 44.1%, a nice jump from the previous year’s share of 35%. Intel commands the rest of the market, although it has lost ground to AMD since the arrival of the Ryzen series processors.
It is also worth noting that AMD’s improved pricing power has led to an increase in processor ASPs. Intel, on the other hand, is struggling with a sharp decline in ASPs. Chipzilla’s desktop processor ASP fell 5% from the year before last year, while portable ASPs fell 17% after taking advantage of discounts to move more devices. AMD, on the other hand, uses its technology and performance advantage over Intel’s chips to demand a premium for its processors, and customers are clearly willing to pay, given the higher shipments.
AMD will probably take more market share from Intel, because the former is expected to launch the next generation Zen 4 processors next year, which will be based on a 5-nanometer production process. AMD’s current Zen 3 chips are based on a 7-nanometer node, which means that the next generation of chips can deliver improved computing and reduce power consumption.
This is because the transistors on a smaller process node are tightly packed together, making them more energy efficient and able to perform multiple calculations. More importantly, the transition to a 5-nanometer process would give AMD a huge advantage over Intel.
Intel’s current Rocket Lake desktop processors are based on the old 14-nanometer process, while AMD uses a modern 7-nanometer process. As a result, AMD can pack more cores into the processors, make them more power efficient, and generate superior performance at the same time.
Chipzilla is expected to move to a 10-nanometer platform later this year when Alder Lake desktop CPUs are launched. It can give AMD a headache, as Intel says the 10-nanometer node contains more transistors than AMD’s 7-nanometer process. However, AMD should be ready to take a leap to the 5-nanometer process by the end of this year, which will help it retain its advantage over Intel.
Big financial gains can be on the cards
AMD’s data processing and graphics segment is still quite small compared to Intel’s. For example, Intel generated $ 10.6 billion in revenue from its client data group (CCG) last quarter, which was more than four times AMD’s revenue from its computing and graphics business.
AMD launched its first generation Ryzen processors in 2017, and they have overloaded the computer and graphics business. The segment’s revenue had jumped to $ 3 billion in 2017 from $ 1.97 billion in 2016. In 2020, AMD generated $ 6.4 billion in revenue from the computing and graphics segment, so the business has more than doubled in three years.
Meanwhile, Intel’s CCG revenue was $ 40.1 billion in 2020, an increase of just 22% from $ 32.9 billion at the end of 2016. Clearly, AMD is growing at a much faster pace than Intel thanks to the gain in market share. More importantly, the size of Intel’s CCG business indicates that AMD has a huge opportunity ahead of it to increase revenue from the sale of client processors.
AMD’s technological advantage over Intel can help it maintain the amazing growth rate of its largest business segment with the help of additional market shares and stronger prices. Not surprisingly, analysts expect AMD to see 32% annual earnings growth over the next five years. Given that AMD shares are now trading at 38 times subsequent earnings compared to its five-year average multiple of 120, it is a peak growth stock to buy right now, as it can add billions of dollars to earnings and increase earnings significantly by consistently hurting its larger rival .
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium consulting service. We are motley! Asking questions about an investment task – even one of our own – helps us all to think critically about investments and make decisions that help us become smarter, happier and richer.