AMD – Old Kid on the New (Data) Block

Chipmaker stocks started the last week of 2021 on an upbeat note, with the likes of Advanced Micro Devices (AMD), Nvidia (NVDA), Western Digital (WDC) and Applied Materials (AMAT) all scoring notable gains. AMD (AMD) shares climbed over 10% through the period before paring gains a bit, and are now up more than 68% for the year. Is this a short-lived contrarian rally, or there is a firmer foundation underpinning it? Indeed, Advanced Micro Devices has turned out to be a lucrative investment in 2021. Shares of the chipmaker have appreciated despite the lukewarm high-tech market this year, driven by the consistently strong growth of the company's top and bottom lines. It took 50 years for the industry to grow to $500 billion today, and now it is estimated that the industry will grow to $1 trillion in roughly eight years.

AMD's CPU market share hit a 15-year high recently, as the company's market share continues to climb in the ultra-competitive x86 chipset market. The company's market share has surged from a low of about 20% in 2015-2018 to roughly 40% recently. If we look at the desktop PCs market where a lot of the gaming occurs, AMD briefly overtook Intel this year, crossing the 50% market share line for the first time since 2006. AMD has seen a rapid rise in this segment from the company's 20%-25% share about five years ago. The critical battleground remains the laptop market, where AMD's market share was down to only around 8% in recent years. However, the company has recently made significant advances capturing nearly 25% of this lucrative market.

Just a few years ago, AMD took the data center by storm by announcing a 64-core CPU when the current maximum from Intel was 28 cores. Looking forward, in 2024, AMD will launch 192-core and 256-core CPUs.

The company's enterprise, embedded, and semi-custom (EESC) business is set for another year of solid growth thanks to the data center and gaming console markets. This segment produced 44% of AMD's total revenue in Q3 2021 recording 69% growth annually to $1.9 billion. EPYC data center processors and semi-custom chips, which are used in gaming consoles, are reportedly behind this segment's exorbital growth.

What's more, gaming console sales are expected to gain momentum in 2022. Sony (6758.T) expects to sell 22.6 million PlayStation 5 consoles in the reporting period that begins in April 2022, representing a jump of 53% over the current fiscal year's projected sales of 14.8 million units. In its turn, Microsoft (MSFT) is expected to ship 21 million units of the Xbox Series X console in 2022, as compared to 2021's estimate of 12 million units.

AMD stock seems to be reasonably valued now. AMD expects to finish 2021 with an estimated revenue increase of 65% YoY. The chipmaker could deliver $16 billion in revenue this year, as compared to $9.8 billion in 2020, while earnings are expected to more than double to $2.63 per share, as compared to $1.29 per share last year. However, consensus estimates suggest that AMD may not grow at such an eye-popping pace in 2022 because of the overall capital gain taxation issues in the U.S. Moreover, the stock is trading at an EV/EBITDA of 36.2x, already above its 3Y median of 31.5x but well off its 3Y high of 49.8x. It shows that AMD shares have substantial potential for further appreciation.