Advanced Micro Devices (AMD, Financial) is improving its performance as its latest results show. The stock is trading close to its all-time highs. The growth trend that it is showing is commendable, and the fifth consecutive quarter of earnings growth can be yet another attractive point for investors looking to invest in the stock. It is expecting strong business from its segments such as Enterprise, Embedded and Semi-Custom. However, it might face challenges in the computing and graphics business due to softness in the consumer PC market. Let's take a closer look
Growing at a good pace
Its key areas are seeing good growth, and the company is counting on the growth opportunities surrounding it. The robust revenue growth across the embedded processor segment is expected to bring more traction for its offerings. Besides, the company has also seen several design wins across its priority markets which are expected to drive its sales further. Another exciting fact is that Arista which is a leader in software driven cloud networking is ramping up the production of new switches which is a good sign and can be a good driver for the company in future if it gains traction.
Further, AMD’s transition towards the 64-bit ARM seems to be a good move by the company as it is seeing positive response in the market. Now to add more value to this initiative, AMD continues to build a 64-bit ARM server Ecosystem before its launch next year. This can be a solid move by the company, and AMD can strengthen its market position on the back of it.
Design win pipeline is strong
The company is pleased with its design wins, and it thinks that some of these design wins can strengthen its long-term profitability prospects. Moreover, AMD has recently secured two design wins for which it is confident of delivering combined lifetime revenue of $1 billion at least for the next three years. In addition, AMD is making progress in diversifying its business to semi-custom business beyond gaming and is anticipating good silicon revenues by 2016. The stock can be a good long term holding on the back of it.
It is seeing impressive growth in the server markets where its products are moving well among the customers. It is seeing growing traction for its 64-bit ARM based semi-custom design. With such a strong win pipeline, AMD sees good opportunities for future growth with it.
Due to a soft PC market, the company is seeing weak performance in its computing and graphics business. As it is one of the key areas for AMD, the company has several objectives to improve the financial performance of this segment. It has made some exciting efforts including expansion on the commercial client market, improving its mix in customer notebooks, gaining share in professional graphics and AIB channel sales. It is also pleased with the new commercial client offering from some of the well-known names such as Dell Inc. (DELL, Financial), Hewlett-Packard Co (HP, Financial) and Lenovo. This has led to a 50% increase in the commercial APU shipments which is a good growth and is expected to continue even in future.
AMD is expecting better growth in the professional graphics market, it is seeing lot of new growth opportunities with this segment. Further, with the ramp up in the channel sales and new design wins with Dell and HP AMD is confident of its better position in the future.
Conclusion
The stock looks expensive with a trailing P/E of 40.76 but with forward P/E of 29.89 shows solid earnings growth in the near term. It can also be a good long term holding as its earnings for the next five years are growing with a CAGR of 42.50% which is good as compared to the industry average of just 19.89%. AMD is a good pick, and the investors should not mind paying heavy premium for the stock as its earnings growth is strong and the stock is also gaining good market share.
