During periods of market volatility and deteriorating breadth like we have witnessed over the past few trading sessions, it’s always a good idea to keep an eye out for buying opportunities in the strongest stocks.
Getting too caught up in the ebbs and flows of the indices tends to distract investors from their overall goal - generating long-term alpha by identifying businesses with innovative products and services.
For example, semiconductor stocks are a great place to look for buying opportunities on market weakness given all of the secular growth drivers that are creating opportunities for the best companies in the industry.
Advanced Micro Devices (AMD) - Get Advanced Micro Devices, Inc. Report is one chip stock that really stands out, as there are plenty of catalysts specific to its business that could help the stock rally in the coming months.
With substantial demand for AMD’s computer chips expected to deliver strong annual sales growth this year, a fantastic opportunity to take market share away from a rival, and a potentially groundbreaking acquisition on the horizon, there’s a good chance this stock is headed for $100 a share sooner than the current market action would lead you to believe.
Let’s take a deeper look at why AMD stock could be on its way toward passing the century mark in the coming months.
Explosive Growth Across All Business Segments
When you consider all of the different forms of technology that rely on AMD’s high-powered chips, it’s easy to recognize the opportunity here.
We live in an increasingly tech-centric world, which means that the need for devices such as computers, consumer electronics and data centers is increasing at an astounding pace.
AMD designs the microprocessors that power these devices, and the company is experiencing explosive growth across all of its major business segments at this time.
The company’s central processing units are essentially the brain of a computer and are seeing heavy demand thanks to data center growth and a red hot PC market.
AMD’s graphics processing units are used to increase the speed of rendering images and improve image resolution and color definition. With high growth end markets like video games and machine learning, this is another area of AMD’s business with clear upside.
For confirmation that this is a business firing on all cylinders, look no further than the company’s massive first-quarter earnings beat, as AMD’s revenue improved by 93% year over year to reach $3.45 billion.
This top-line growth was driven by higher revenue in computing and graphics and enterprise, embedded and semi-custom segments, which tells us that the company’s Ryzen, Radeon and EPYC processors are flying off the shelves.
Given that AMD boosted its forward guidance after the first quarter and now anticipates 50% annual sales growth vs. the previously anticipated 37%, the strong earnings momentum here should play a big part in helping the stock outperform going forward.
Gaining Market Share from Intel
However, thanks to a delay in the production of Intel’s newest generation of chips and incredibly strong data center sales in wake of the pandemic, AMD is gaining significant market share from its competitor and should continue to do so going forward.
AMD competes with Intel to supply data center chips, which are in high demand across the cloud and enterprise markets with so many companies moving forward with their digital transformations.
The key difference between Intel and AMD here is that Intel handles the manufacturing of its chips in-house, while AMD operates with a fabless model.
That means AMD relies on third-party foundries like Taiwan Semiconductor Manufacturing (TSM) - Get Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR Report to create its cutting-edge chips instead of handling the manufacturing itself.
Intel’s chip manufacturing woes will last until early 2022, which provides AMD a nice window of opportunity to continue taking business away from Intel.
It’s worth noting that in the first quarter, AMD’s data center revenue doubled while Intel’s data center revenue declined by 20%.
Any further evidence of this shift in market share after both companies report their second-quarter earnings in late July could be a strong catalyst for AMD stock.
Xilinx Acquisition a Potential Game-Changer
High-profile acquisitions can be hit or miss, but investors should certainly be intrigued by AMD’s move to acquire Xilinx (XLNX) - Get Xilinx, Inc. (XLNX) Report, the leader in programmable logic chips that are used in data centers, machine learning, 5G, edge computing, and more.
The deal is expected to close by the end of the year and could be just the catalyst the stock needs to get going.
There’s a lot to like about this strategic move, as it increases AMD’s total addressable market to $110 billion and won’t add a ton of debt to the company’s balance sheet.
The deal could be a game-changer for AMD, as it will allow for more growth in the cloud data center market and diversify the company’s revenue streams.
Although this deal still has to pass a few regulatory hurdles, it’s clear that AMD is currently generating a ton of cash and using it aggressively to develop a true industry-leading product portfolio.
While AMD stock might drop in the short term amid market volatility, a dip to the 200-day moving average could end up being a great place to add shares for a move back to $100 later this year.