AMD Crushes Estimates; Time to Get In?

The chip shortage is still going strong in some sectors, and gains are being made accordingly. That’s the case for Advanced Micro Devices (AMD), which recently posted its earnings report to investor acclaim. The company saw its stock gain 6.1% in premarket trading, although it is now up about 3.5%.

I’m bullish on AMD right now. That’s largely thanks to the perfect-storm combination of increasing use cases for processing chips and the declining supply. This should add up to be a great thing for anyone making chips – like AMD.

The last 12 months for AMD have seen ups and downs alike, though mostly in equal measure. May to November of 2021 saw AMD climb sufficient to double its share price from May 2021. November to May 2022, however, saw most of those gains lost.

The latest news, meanwhile, offers some hope for investors. The company posted an amazing earnings report that featured analyst projections shattered. AMD turned in $1.13 per share in earnings, which beat Street forecasts of $0.91.

Revenue came in at $5.89 billion adjusted, which beat estimates calling for $5.52 billion. Revenue represented a gain of 71% against this time last year, and earnings were up a staggering 117%.

Wall Street’s Take

Turning to Wall Street, AMD has a Moderate Buy consensus rating. That’s based on 14 Buys and eight Holds assigned in the past three months. The average Advanced Micro Devices price target of $134.11 implies 43.1% upside potential.

Analyst price targets range from a low of $98 per share to a high of $200 per share.

Investor Sentiment Looks Positive for the Chipmaker

Sometimes, investor sentiment isn’t that clear. Sometimes, it’s much more so. AMD investor sentiment, meanwhile, is mostly clear and mostly positive.

First, let’s check out the retail investors who hold portfolios on TipRanks. Retail investor involvement has increased substantially over the last month, though it’s tapered off a bit in recent days. In the last seven days, TipRanks portfolios with AMD are up 1.6%. In the last 30 days, they’re up 6.9%.

Then there’s the matter of hedge funds. Hedge funds are very interested in AMD, the TipRanks 13-F Tracker reveals. Hedge funds have put more cash behind AMD every quarter since March 2021.

The bump up from March to June is small but present. More pronounced increases followed in the next two quarters. In fact, December 2021’s involvement level is nearly double what it was in December 2020.

There are two downside points to consider, however. AMD doesn’t pay a dividend, and there are no signs of a dividend to come. That’s bad news for income investors. Then there’s the matter of insider trading at AMD.

Insider trading in the last three months is evenly matched, with four buy transactions and four sell transactions. In the last year, there were 21 buy transactions and 42 sell transactions.

It’s important to note, however, that that selling activity mainly took place during AMD’s big run-up back in the May to November 2021 corridor. The buying kicked in on the downside, which is reasonable behavior for any investor.

The Chip Shortage Continues, Making AMD’s Future Brighter

The good news—though it’s backhanded good news at best—is that the chip shortage is likely to continue for some time. Intel (INTC) CEO Pat Gelsinger suggests that the chip shortage is likely to continue until at least 2024. Gelsinger suggests that “…constrained availability of key manufacturing tools” will become an issue.

Meanwhile, Ford (F) reported a 10.5% sales decline. Though this was a smaller sales loss than had been seen earlier, the chip shortage was still hurting car supplies. Supplies of PlayStation 5 units will likely continue to see shortfalls going into 2024 as well, reports note.

Take these factors together, and suddenly, things look good for AMD. Not only will there be steady and rising demand for all its products—AMD itself looks for gains from increasing demand from data centers—but the ability of other firms to join the fray and pull market share will decline as well. That should open up a new opportunity for AMD to sell about as much as it can produce.

Basically, there’s more demand than ever for chips. There’s a growing demand for things that you wouldn’t expect to have a chip in them but do somehow (like cars). There’s a growing demand for gaming consoles; the new console versions are spiking demand, especially with lingering concerns over COVID-19.

Take the combination of ongoing high demand for AMD products, a declining number of firms that can even get into the market, and AMD’s recent drop in value over April, and that certainly suggests a course of action.

Granted, some are concerned about the impacts of inflation on chip demand, and with good reason. When people are struggling to buy food, they’re not going to be too interested in a new computer.

However, consider how wide the demand/supply gap is right now. Consider Ford’s “Ice Mountain.” Back in February, an array of new Broncos sat in an outdoor lot, awaiting the last chips needed to complete them.

While inflation will certainly have an impact, it’s safe to say that the demand right now is sufficiently broad that it can accommodate a little inflation-fueled loss.

Concluding Views

Demand for computers is brisk across virtually every sector of the economy. Big data systems demand computers to search for actionable patterns. Smart homes need computers to operate their various voice-controlled systems. Gamers need computers to play the latest titles. The list just keeps going.

With all these use cases on AMD’s side, even some inflation-induced losses aren’t likely to slow the overall trajectory of demand very much. That, combined with some attractive per-share pricing right now that’s well under highs, makes for a combination that’s hard to resist. That’s exactly why I’m bullish on AMD.

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