Advanced Micro Devices (AMD 0.69%) has made tremendous gains under CEO Lisa Su. The stock is up 980% since she took over as CEO in October 2014. Last year AMD saw revenue climb by more than 20% for the second consecutive year, and this could be just the beginning of its run under Su's leadership.
What's most impressive about the company's comeback is that Intel (INTC -1.79%) significantly outspends AMD on research and development every year, and yet AMD is beating the chip giant to market with a 7-nanometer server chip (Rome), which has Intel on its heels for the first time in more than a decade.
Here are three catalysts that should fuel AMD's top-line growth going forward and pave the way for further share price gains.
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1. The road to Rome
AMD is rolling out new 7-nanometer chips this year as a result of the company's effort to make big bets on products that can deliver the best technology to customers. The new 7-nanometer products, which range from server processors to graphics cards for PC gamers, feature smaller chips, are more power efficient, and promise to deliver faster processing speeds. That should position AMD to take market share from competitors this year.
Su expects AMD to win a double-digit share in the server market over the next four to six quarters, as Advanced Micro is starting to ship the Rome chip, which will begin to contribute to growth in the second half of 2019. If AMD reaches double-digit share in the server market (it's now at about 3.2%), it would mark an enormous gain over the company's 1% share it had a few years ago.
But Su is much more ambitious. She told Barron's last fall that AMD's long-term goal was to exceed the 25% share of the server market AMD had in 2006. At this point, there's no reason to doubt AMD's ability to achieve this. The company's recent share gains have come on the back of its EPYC processors, and the new Rome chip promises to deliver two times the performance of EPYC, while Intel has experienced delays in launching its 10-nanometer processors.
Intel is not expected to ship its 10-nanometer chips for servers until early next year, providing AMD a great opportunity to fill the void for data center customers who might benefit from a second alternative to Intel's dominance.
2. Upside with consoles and gaming notebooks
NVIDIA (NVDA 0.76%) has controlled the lion's share of gamers' wallets since 2005, and with Team Green gaining industrywide acceptance of its new ray tracing graphics technology, it's unclear whether AMD can ever win the majority share in the add-in board market. But there is a catalyst in the short term for AMD to see its add-in board market share rise from its recent 22.7% in the first quarter.
AMD is poised to gain some share when it launches the new Navi graphics cards in the third quarter featuring the company's 7-nanometer chips. I don't expect AMD to beat NVIDIA's Turing cards, which are well solidified right now at the high end of the market. But after AMD's market share dropped from 34% a year ago to 19% in Q4 2018, AMD has nowhere to go but up at this point, and Team Red's Vega gaming cards have had success against NVIDIA at the mid-tier of the market.
Looking beyond the short term, sales of gaming notebooks should drive AMD's gaming sales. Both NVIDIA and AMD have seen skyrocketing demand for gaming notebooks that feature desktop-class processing power in a compact form factor. AMD is on pace to see more than a 50% increase in the number of notebook models shipped this year with the latest Ryzen processors. The strong demand shows the gaming notebook market heating up as the current console cycle is getting long in the tooth.
What's more, the next console generation is going to kick off in 2020, and AMD is looking golden, with both Sony and Microsoft announcing that their next-gen consoles will feature AMD processors.
3. Big wins in the cloud
Lastly, AMD has made substantial gains in the cloud market. Alphabet selected AMD to power the upcoming Google Stadia game streaming service. AMD is seeing growing interest in platforms designed for game streaming, machine learning, and high-performance computing (HPC) workloads.
AMD has also added dozens of new enterprise customers ranging across several industries -- including aerospace, healthcare, automotive, and telecommunications -- that are using the company's EPYC processors. AMD also continues to expand its relationship with the 500-pound gorilla in the cloud market, Amazon.com.
AMD is a buy
The secular shift to cloud computing, big data, and autonomous vehicles is benefiting all the top chip companies. Intel and NVIDIA will continue to score points in these markets, but AMD is proving it has the technology to grab some share of these markets, too.
The stock is up nearly 600% over the last five years, but analysts see AMD at the beginning of a multiyear growth streak in earnings per share, as sales shift to higher-margin products, such as server chips. Analysts expect AMD to grow earnings by 39% this year and by 35% annually over the next five years. At a price-to-earnings-growth (PEG) multiple of 1.31, AMD stock is not a bargain, but I believe the stock can still climb higher over the next five years.
