Stocks to buy

Chipmaker Advanced Micro Devices (NASDAQ:AMD), better known as AMD, has been on a roll this year. The company is well-positioned for future market share gains as its diverse product array drives growth in its business. And despite its stellar fundamentals and future outlook, AMD stock trades at a considerable discount to its peers.

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AMD stock has grown by just 10% in the past three months. Its shares have underperformed for almost the entire first half of 2021. However, the stock appears poised for a resurgence.

Still, with forward revenue and EBITDA growth estimated to be 36% and 58% respectively, the stock is considerably undervalued. It trades at just 7.5 times forward sales, whereas its competitor in Nvidia (NASDAQ:NVDA) is trading at 19.6 times forward sales. History suggests that AMD stock could gain handsomely in the second half of 2021 and close out the year in style.

What to Expect From the Second Quarter Results

AMD will be reporting its second-quarter earnings results on July 27 after the close of the market. It has had a solid track record of repeatedly beating top- and bottom-line estimates.

The company has beaten estimates in 11 of its past 15 reports, so it’s a given for investors to be optimistic about its second-quarter earnings. According to its estimates, AMD’s Q2 revenue should be $3.6 billion. That translates to a whopping 86% gain on a year-over-year (YOY) basis.

Moreover, it also anticipates its gross margins to be a healthy 47%. Unsurprisingly, analysts believe AMD’s earnings per share will triple from the prior-year period to 54 cents.

Investors should note that these comparisons are being made to Q2 of 2020 — the most beaten-down quarter in the past year due to the Covid-19 pandemic. However, AMD’s Q2 revenues in 2020 — which were relatively low at just $1.9 billion — were up 26% from the prior-year period. That makes for a much easier comparison this year.

The Outlook for AMD Stock

In April, AMD showed signs of an incredible second-half performance when it bumped its full-year revenue growth guidance to 50%. The company’s management is likely to raise its guidance again when it releases Q2 earnings, exhibiting strength across all its core businesses.

In Q1, its enterprise, embedded and semi-custom segment was perhaps its most successful. It posted a healthy growth of 286% on a YOY basis to $1.35 billion. Two primary catalysts in the area are its processors and its tech for gaming consoles.

AMD’s chips power two next generation gaming consoles: Sony’s  (NYSE:SONY) PlayStation 5 (PS5) and Microsoft’s (NASDAQ:MSFT) Xbox Series X. Both companies are witnessing terrific demand for their products. The PS5 could be the most popular console in Sony’s rich history and might reach 22.6 million units sold by 2023.

Moreover, AMD’s server central processing units (CPUs) segment is also driving gains. Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google Cloud recently tapped its EPYC server chips to launch its new services. Hence, it won’t be long before AMD seriously dents its competitor Intel’s (NASDAQ:INTC) business.

Meanwhile, AMD’s computing and graphics segment witnessed a spectacular 46% YOY growth in the first quarter.  This was due to solid demand for its Ryzen processors and Radeon graphics cards. In a recent interview, CEO Lisa Su stated that demand for Ryzen CPUs continues to exceed supply despite the company’s best efforts.

Expect Gains for AMD Stock

AMD has performed phenomenally well in the past year and the first quarter. It should continue its incredible form throughout the second half of this year and post record numbers.

I expect AMD stock to start picking up the pace as well, but it trades at a fairly reasonable price around $91 per share. It is trading at a substantial bargain and with such bright prospects ahead, the stock cannot be missed.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 

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