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Shares of Advanced Micro Devices (NASDAQ: AMD ) have been relatively quiet since November 2018. AMD stock has still made some big moves, mostly just bouncing between $15 and $25. But the recent volatility of Advanced Micro Devices stock pales in comparison to what happened in mid-2018, when AMD stock went from under $10, to over $30, to under $20 in a matter of months.
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This relatively muted volatility of Advanced Micro Devices stock in 2019 shouldn't come as a surprise. The narrative about AMD stock has gained more clarity over the past several quarters. Specifically, we now know that it is rapidly gaining server and GPU market share, while its margins are consistently increasing, thanks to its entrance into higher-value end markets.
But we also know that AMD's major competitors - Intel (NASDAQ: INTC ) and Nvidia (NASDAQ: NVDA ) - aren't going anywhere anytime soon, and that the global semiconductor industry is facing some serious demand headwinds.
So AMD's outlook right now is neither great nor bad. Rather, it's just good. Prices closer to $30 imply a great outlook. Prices closer to $20 imply an outlook that's more on the bad side. As a result, it shouldn't be surprising to see Advanced Micro Devices stock range-bound between $20 and $30.
If Advanced Micro Devices stock drops back to $20, the decline should broadly be seen as an opportunity to add exposure to a non-cyclical growth company at a discounted price.
The Fundamentals of Advanced Micro Devices Support a $25-Plus Price Tag
The fundamentals underlying AMD stock are pretty good, and they indicate that Advanced Micro Devices stock can trade north of $25 by the end of 2019.
In the big picture, this is a relatively small company (AMD has a market cap of $24 billion) that's immersed in a very big global semiconductor market that has nearly $500 billion of annual revenues. Moreover, the sector is supported by continuous-growth trends in cloud, data, IoT, automation, and AI. That market also supports competitors like Intel and Nvidia, both of whom have $90 billion-plus market caps. Thus, as long as AMD can continue to expand its share of the enormous and rapidly growing global semi market from a relatively small base, Advanced Micro Devices stock will stay on a winning path.
That is exactly what is happening right now. Recent quarterly numbers broadly confirm that AMD is executing almost flawlessly on its product development, driving server and GPU market share gains alongside improved profitability.
Consequently, AMD is delivering a trifecta of healthy revenue, margin, and profit growth, improving investors' sentiment towards Advanced Micro Devices stock, adding clarity to the long-term bull thesis on the shares, and pushing AMD stock higher.
As long as AMD looks poised to continue to expand its market share, AMD stock will continue to trend higher. That's because, assuming AMD's double-digit growth persists for the foreseeable future, while its profit margins continue to trend towards management's long-term targets, it's only a matter of time before the company's earnings per share hit $2. Based on my calculations, that could happen anywhere between 2023 and 2025. Using a growth-average multiple of 20 times forward profit estimates, the average multiple for growth stocks, that means that Advanced Micro Devices stock will hit $40 anywhere between 2022 and 2024.
Discounted back by 10% per year, that provides a range of 2019 price targets for Advanced Micro Devices stock between $25 and $30. At the midpoint, that represents nearly 40% upside from $20, implying that those who buy Advanced Micro Devices stock at $20 can make meaningful profits by the end of the year.
Advanced Micro Devices Stock Has Strong Technical Support Around $20
Another reason to like AMD stock on a pullback near $20 is that every time Advanced Micro Devices stock has dropped below $20 over the past year, it subsequently rallied back above $20.That sequence of events played out in late October 2018, late November 2018, late December 2018, and late January 2019. During each one of those stretches, AMD stock dropped below $20. Within a few weeks after each of those drops, AMD stock rallied to nearly $22 or higher.
History should repeat itself this time around. Consequently, I expect the next drop of Advanced Micro Devices stock to $20 (which could happen soon) to be followed by a rally back towards $25, driven mostly by improvements in the outlook of the global semi market and progress on the U.S.-China trade war front.
The Bottom Line on Advanced Micro Devices Stock
I'm not sold on AMD stock as a buy-and-hold-forever type of stock. But Advanced Micro Devices stock is a good name to buy on substantial dips. Right now, we might be on the cusp of one of those big dips, and $20 looks like a solid entry point.
As of this writing, Luke Lango was long INTC.
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