Can AMD Sustain Its Turnaround?

| About: Advanced Micro (AMD)


AMD has made a solid comeback after a poor start to the year, and it looks like the company will continue doing well.

AMD's new products are gaining traction.

AMD's valuation and earnings growth projections are strong, making the company a solid long-term buy.

Advanced Micro Devices (NYSE:AMD) has made a steady comeback after beginning the year on a negative note. So far in 2014, AMD has appreciated almost 7% after hitting a roadblock in January. Earlier this year, AMD issued a weak outlook and its shares fell 10%. However, the company has made a remarkable comeback and looks set to get better.

The turnaround

AMD's turnaround started as the stock rose nearly 12% on the back of a robust performance in the first quarter. Its revenue increased an impressive 28% year over year, mainly driven by the healthy demand for its newest Radeon GPUs, semi-custom gaming APUs, and powerful x86 processor cores. In addition, as AMD-powered Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) game consoles have outpaced the previous generation, AMD is seeing strong momentum in the semi-custom business.

As I mentioned in my earnings preview, the semi-custom business is expected to continue growing at a terrific pace. I had stated:

"The company's successful relationship with Sony and Microsoft for gaming consoles has proved to be solid so far, and since demand for these products is continuously increasing, AMD can see an increase in sales of its flawless semi-custom products.

With more than 7 million units sold in less than 2 months, as reported by Sony and Microsoft, the new consoles are off to a solid start. As a result, AMD expects the demand for its semi-custom chips to double in the current year, leading to strong revenue growth."

AMD has been able to turn its bottom line around due to the rapid growth that it is seeing. In the previous quarter, its net income rose to $12 million as compared to a net loss of $94 million last year. Going forward, the chipmaker is confident about further progress. It expects better results from the PC market as many new designs are on the way from its OEM partners that will deliver sequential PC revenue growth.

More growth ahead

AMD sees a big opportunity in high-performance embedded SoCs and processors, projecting a total addressable market of $9 billion. The company should also benefit from the product life-cycle of its customers, which is in the growth stage right now, hence providing a more predictable and consistent revenue stream for AMD.

AMD has built strong relationships with customers in key verticals such as digital signage and medical, landing important design wins. This move will certainly help AMD capture a bigger share of the market and deliver strong results.

Moreover, AMD is also finding momentum in its professional graphics business. For example, the Apple (NASDAQ:AAPL) Mac Pro uses two of AMD's industry leading FirePro GPUs. The company looks determined to expand its professional GPU products, and the launch of its new flagship FirePro w9100 GPU is already leading to more inquiries from customers. According to AMD,

"This GPU is attracting significant interest from video, design and engineering professionals who need to work at the latest 4K resolutions and beyond."

AMD recently introduced Seattle, its first 64-bit ARM server processor, based on an industry-first 28-nanometer technology. This has positioned AMD as the only SoC provider to bridge the x86 and ARM ecosystems for server application. The company has already started sampling Seattle and plans to start shipping it in the second half of the year.

AMD expects its personal computing business to continue performing well as new designs have been built with OEM partners, and the company has witnessed an increase in shipments of its mobile APU units. Furthermore, the company has launched Beema and Kaveri APUs that are embedded in Notebooks.

Also, AMD has upgraded its product portfolio in the desktop channel and has launched A8 and A10 APUs, thereby bolstering its desktop portfolio. Moreover, the company experienced record unit shipments in the last quarter, and expects the momentum to carry on for the current quarter and the second half of fiscal 2014.

Solid fundamentals and growth expectations

AMD currently trades at a trailing P/E of 85 and a forward P/E of 17, which means that it could be a solid buy as its earnings are expected to grow at a good pace going forward. Also, its PEG ratio stands at 0.58, indicating that its earnings are expected to grow at a terrific rate in the future. In addition, analysts estimate AMD's earnings to grow at a CAGR of more than 30% for the next five years, which makes it a solid growth pick. So, investors should definitely consider buying AMD for the long run as the company looks set to get better.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.