Analysis: AMD VZ INTC NVDA

After you receive this Alert, we will be initiating a position in Advanced Micro Devices (AMD) , buying 300 shares at roughly $53.35. Following the trade, AMD will represent 0.55% of the portfolio. 

We will be adding AMD to the portfolio as our recent exit of Verizon Communications (VZ) has made room for an additional name. You can find management's most recent investor presentation at the link here. The stock is not in our bullpen, but we have had our eyes on this one for a while and it is part of a bullpen update we plan on doing around our next monthly members-only call.

For those unfamiliar with the name, AMD is a chip maker that specializes in the development of both CPUs (like Intel (INTC) ) and GPUs (like Nvidia (NVDA) ). On the CPU side, the company continues to take share from Intel in the data center thanks to its 2nd generation EPYC processor line, which is seeing increased adoption in the super computing and high-performance computing space, which you can read more about at the link here.

On the GPU side, while Nvidia remains the unquestioned leader in terms of overall performance, AMD is the close on its tail and provides a strong balance between price and performance. AMD is also seeing strong momentum in the mobile space, recently announcing that its Ryzen platform has exceeded its moonshot 25x20 goal set in 2014 that aimed to improve the energy efficiency of its mobile processors 25 times by 2020.

Regarding the company's strong financial performance, AMD saw 40% revenue growth in the first quarter of 2020 (press release here, driven by incredible 73% annual growth in the Computing and Graphics segment, with gross margins expanding 5 percentage points annually and expects to see roughly 21% sales growth in the second quarter, thanks to solid growth from the Ryzen and EPYC platforms, as well as a rebound in semi-custom revenues as production ramps in anticipation of the PlayStation 5 and Xbox Series X console launches later this year, both of which will feature AMD graphics cards. Moreover, the company expects full year sales to improve 25% annually and margins to improve overall compared to FY 2019.

The stock has been an outperformer year to date, gaining more than 16% against the ~1.75% drop in the S&P 500 but is only roughly in-line with the Nasdaq's ~17% run. Now this is coming off a 2019 year in which AMD massively outperformed, curiously however, the stock has pretty much gone nowhere since April despite share gains against rival Intel and positive product announcements.

We believe this sideways action is our opportunity to get a position on. We think AMD is not getting the respect it deserves, especially when you factor in the current strength of data center (which could lead to an upside surprise in the next earnings report) and the company's positioning in the next-gen video game console cycle. Although we are starting relatively small as we, of course, want to leave room to scale into the position over time, this purchase today allows us to get some shares on before AMD starts getting credit again for the themes above.

We are initiating a position with a price target of $60, reflecting 40x consensus 2021 earnings per share.