AMD Stock Forecast: What To Watch For The Rest Of 2021

Summary

• AMD stock price has increased by only 9% this year and underperformed the key benchmark stock indices over the same period, as a result of valuation multiple compression.
• AMD is expected to deliver strong top line and bottom line growth for the full year, but a slowdown in 2H 2021 vis-a-vis 1H 2021 is inevitable.
• AMD is a Hold, and I will watch out for wafer prices and potential competition for the rest of 2021.
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Elevator Pitch

I rate Advanced Micro Devices, Inc.'s (NASDAQ:AMD) shares as Neutral.

AMD's forward P/E multiple has compressed from 65 times at its peak in September 2020 to 37 times now, and the stock's current valuations are roughly in line with its historical averages prior to COVID-19. AMD's full-year fiscal 2021 financial performance is expected to be good, but its Q3 and Q4 2021 growth should moderate from levels seen in the first half of this year.

For the rest of 2021 and beyond, wafer prices and competition from ARM are key things to watch, as they represent potential downside risks to the company's future revenue and earnings. My rating for AMD is a Hold or Neutral, taking into account the different issues discussed in this article.

Company Description

In the company's FY 2020 10-K, Advanced Micro Devices, Inc refers to itself as "a global semiconductor company" that supplies "x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs." This is the company's core Computing & Graphics business.

Excluding other expenses relating to stock compensation and M&A (Mergers and Acquisitions), AMD's core Computing & Graphics segment contributed 76% of its operating income in fiscal 2020, respectively as per the company's 10-K filing.

The Enterprise, Embedded and Semi-Custom business segment accounted for the remaining 24% of Advanced Micro Devices' operating profit in the most recent fiscal year. AMD noted in the company's SEC filings that its Enterprise, Embedded and Semi-Custom segment focuses on "server and embedded processors, semi-custom System-on-Chip (SoC)" for "game consoles."

Advanced Micro Devices also earned 77% of the company's top line from foreign markets outside the US, based on its 10-K filing for fiscal 2020.

AMD Stock Price

AMD's stock price performance has been rather lackluster this year. Year-to-date, Advanced Micro Devices' share price rose by 9%; while the three major stock indices, the S&P 500, the Nasdaq Composite and the Dow Jones were up in the low to mid teens percentages over the same period.

In a nutshell, rising earnings expectations for AMD have been offset, to a large extent, by multiple compression.

The market consensus estimate for 2021 normalized earnings per share for Advanced Micro Devices has been raised by 37% from $1.83 as of the end of last year to $2.50 now. However, AMD's consensus forward next twelve months' P/E multiple has gone down from 52.6 times at the start of this year to 37.4 times as of October 4, 2021 based on S&P Capital IQ data.

I will touch on AMD's earnings expectations for the remainder of this year in the subsequent section. In this current section, I will focus on Advanced Micro Devices' valuations.

In the second half of 2019, prior to the onset of the coronavirus pandemic, Advanced Micro Devices traded in the 30-40 times consensus forward next twelve months' P/E multiple range. But AMD's forward P/E multiple started to expand in early 2020 and eventually reached as high as 65.4 times on September 1, 2020. An earlier June 19, 2020 Financial Times article had noted that COVID-19 "lifted its (AMD's) prospects by fueling sales of home PCs and bringing more demand for data center capacity from big internet companies that use its chips."

It is only natural that AMD's forward P/E multiple has corrected from its peak of around 65 times last year to the 30-40 times range (aligned with historical averages) now, as super-normal demand for data centers and personal computers normalizes in tandem with the easing of lock-downs and the reopening of economies. AMD's top line expansion is expected to slow significantly in FY 2022 as compared to FY 2021, as per the peer valuation comparison table below.

AMD's current 37.4 times consensus forward next twelve months' P/E is close to the stock's three-year mean forward P/E multiple of 41.5 times in the 2017-2019 period prior to COVID-19.

It is also worthwhile to compare AMD's current valuations with that of its peers. AMD is primarily competing with NVIDIA Corporation (NVDA) and Intel Corporation (INTC) in the GPU and CPU (Central Processing Unit) markets, respectively.

Advanced Micro Devices' Peer Valuation Comparison

Stock	Consensus Forward Next Twelve Months' Normalized P/E	Consensus Current Fiscal Year Revenue Growth Rate	Consensus Forward One Fiscal Year Revenue Growth Rate	Consensus Current Fiscal Year ROE	Consensus Forward One Fiscal Year ROE
AMD	37.4	+60.6%	+15.8%	42.0%	35.5%
NVIDIA Corporation	46.7	+54.5%	+12.7%	48.7%	36.7%
Intel Corporation	12.9	-5.3%	-0.7%	22.3%	19.4%

Click to enlarge

Source: S&P Capital IQ

Intel is much cheaper than both AMD and NVDA, but this is understandable, as INTC is expected to see revenue contraction in fiscal 2021 and 2022 as compared to the robust top line expansion for its two other peers.

The market currently values Advanced Micro Devices at a discount to NVIDIA Corporation with respect to the forward P/E valuation metric. Although AMD boasts faster expected revenue growth rates vis-a-vis NVDA, the company's forecasted ROEs are inferior. Also, it is noteworthy that AMD is the smallest of the three companies with its trailing twelve months' revenue approximately 60% and 17% of the respective revenue base for NVDA and INTC, respectively as per S&P Capital IQ data.

In the subsequent section, I discuss about AMD's financial expectations and forecasts for the rest of 2021.

AMD Stock Forecast

Looking ahead, Advanced Micro Devices guided for Q3 2021 revenue of $4.1 billion and a +60% YoY revenue growth for fiscal 2021. The company also sees its gross profit margin maintained at 48% both for the third quarter of this year and the full year. This is similar to what the Wall Street analysts are forecasting as well.

According to S&P Capital IQ's market consensus financial data, the sell-side is expecting AMD to deliver $4,107 million of sales in the next quarter and achieve a +60.6% top line expansion this year. Wall Street anticipates AMD generating gross profit margins of 47.99% and 47.86% for Q3 2021 and FY 2021, respectively.

More important, both sell-side estimates and management guidance point to AMD's revenue growth to above +90% YoY in the first & second quarters of 2021 to +47% and +30% for Q3 2021 and Q4 2021, respectively. As I highlighted in the preceding section of this article, the more moderate top line expansion for AMD in 2H 2021 is reasonable and explains AMD's valuation multiple compression since the start of this year.

Separately, AMD's gross profit margins for Q3 2021 and Q4 2021 are estimated to be 48.0% and 49.5%, respectively based on Wall Street's forecasts and the company's guidance. This compares favorably with the company's Q1 2021 gross profit margin of 46% and Q2 2021 gross margin of 48%. I believe that AMD can meet its short-term gross margin targets.

The company benefits from a favorable revenue mix with a higher revenue contribution from data center GPUs and a larger proportion of Enterprise clients, both of which boast superior profitability. At its Q2 2021 earnings call, AMD had stressed that it will "ramp production of our next generation AMD instinct accelerators, an open sourced ROCm software" which will be supportive of data center GPU growth in the near term. It also noted at the recent quarterly results briefing that "enterprise will be a stronger component for us than it was in" 1H 2021, based on the fact that it is "seeing very good momentum in enterprise."

All of the above translates into decent EPS growth rates for AMD amounting to +62% YoY and +31% YoY for Q3 2021 and Q4 2021, or +94% increase for full-year FY 2021, as per market consensus numbers sourced from S&P Capital IQ.

Overall, I think that the financial expectations for AMD are realistic as explained above. But there are downside risks to AMD's future earnings, which I highlight in the final section of this article.

Is AMD Stock A Buy, Sell, Or Hold?

AMD stock is a Hold or Neutral.

Advanced Micro Devices operates as part of duopolies in growing markets, and its current valuations are not particularly demanding as compared to history or its key peer NVIDIA Corporation.

But there are two key risks to watch out for, which prevent me from assigning a Bullish rating to the stock.

Firstly, the rise in wafer prices could hurt AMD's gross profit margins for the remainder of 2021.

If AMD's quarterly earnings come in below expectations due to lower-than-expected gross margins (i.e. below 48% guidance) brought about by wafer pricing, the stock could potentially suffer from a valuation de-rating.

Secondly, Arm Limited might pose a greater than expected competitive threat to AMD. As an illustration, Apple (AAPL) introduced M1 last year, which it calls " the most powerful chip it has ever created and the first chip designed specifically for the Mac" based on ARM architecture.

Also, at the Deutsche Bank (DB) Technology Conference in early-September 2021, an attendee noted that "vertically integrated folks doing ARM-based processors", and questioned whether there are "signs of competitive intensity rising." In response, AMD emphasized that "we have a very good relationship with ARM." It remains to be seen if AMD's relationship with Arm Limited will evolve into cooperation or more direct competition in the future.

In summary, I do like AMD's leading positions in the key markets it competes in, and its relatively reasonable valuations relative to history and peers. But I am also cautious about wafer pricing and the potential competition from ARM. This explains why I choose to assign a Hold rating to AMD.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.