Advanced Micro Devices (AMD) has experienced incredible growth since almost going bankrupt in 2014. Alongside the massive share gains, the company is also now an industry heavyweight challenging both Nvidia and Intel for market dominance, in the GPU and CPU segments, respectively.
The chipmaker has also set its sights on expansion. Its ambition stated with the pending $35 billion acquisition of semiconductor peer Xilinx.
Some investors and Street commentators initially balked at the price AMD was willing to pay to bring Xilinx under the fold. But after taking a deep dive into the implications of the merger, RBC analyst Mitch Steves came away “incrementally more positive.”
Steves’ confidence is based on several key points: “1) we think revenue synergies could be substantial and even if we use what we consider to be conservative estimates, we get to rev/EPS of $34B/$5.50 in EPS for 2025E, 2) cost synergies are likely understated at this time and if the business scales appropriately, additional scale benefits should flow through the model and 3) graphics growth is a notable wild card – both PCs and Data Center – while we retain our high conviction call on CPU share gains.”
Of all the possibilities for synergies the merger represents, the 5-star analyst views the communications segment as “the most attractive.” The market is one which AMD has never addressed and estimated at $5 billion. Steves believes that within 2 years AMD can capture more than 10% of market share. Steves notes that CEO Lisa Su, whose impact in turning around AMD’s fortunes cannot be overstated, recently said that Xilinx’ relationships with industry heavyweights such as Samsung and Ericsson, can help AMD penetrate this untapped market.
Accordingly, Steves reiterates an Outperform rating on AM, while lifting the price target from $92 to $100. The implication for investors? Upside of 15%. (To watch Steves’ track record, click here)
Most of Steves’ colleagues agree, although not all are on the same page. Based on 13 Buys, 6 Holds and 1 Sell, the analyst consensus on AMD is a Moderate Buy. Given the $90.41 average price target, the Street anticipates the stock to stay range-bound for now. (See AMD stock analysis on TipRanks)
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