Decoding AMD's Breathtaking 2-Year Rally

Advanced Micro Devices, Inc. AMD has been the best performer among S&P 500 stocks thus far this year, having gained about 111% through Nov. 26. This is despite the stock retracting from the all-time high of $41.79 reached Nov. 19.

A nine-session winning streak leading up to Nov. 19 took the shares to their highest level in over 13 years, although they have come off the multiyear highs.

What makes AMD's gain even more remarkable is that it has come on top of an 80% rally in 2018.

What has fueled the upside? With the staggering gains AMD has notched over a two-year period, does its valuation look stretched — or does the rally have a further leg up?

Rising With Ryzen

Ahead of the stock's turnaround in 2018, the company's fundamentals began to improve following the launch of its Ryzen lineup of processors in 2017.

The first-generation Ryzen chips were built on 14nm process technology and based on Zen architecture. The company followed up with the second-gen Ryzen chips in 2018 and the third-gen chips, based on 7nm technology and Zen 2 architecture, in 2019.

Ever since the launch of the Ryzen processors, AMD has seen its market share slowly and steadily improve vis-à-vis Intel Corporation INTC in the CPU processor market.

From 17.5% in the third quarter of 2016, AMD's market share has improved to 31.2% in the third quarter of 2019, according to PassMark Software.

Source: PassMark Software

See also: Bank Of America Cites 3 Reasons For Recommending Intel

AMD's Bouyant Product Momentum

AMD has a lineup of high core count desktop processors meant for workstations that are branded as Ryzen Threadripper processors. The company also has Ryzen mobile processors, which were initially launched in 2017.

AMD will likely debut its Ryzen 4000 series mobile processors in early 2020, VentureBeat reported, citing an interview with CEO Lisa Su. Zen-3 based next-gen processors are also anticipated later in 2020.

On the server side, the company is set to launch its third-generation EPYC server CPUs, codenamed Milan, based on the Zen 3 architecture and built on 7nm tech.

In the market for GPU chips used for gaming, AMD is striving to shed its image as a low-cost supplier and is challenging NVIDIA Corporation NVDA at the high-end, while also fortifying its position in the low- and mid-end.

Sell-Side Largely Backs AMD 

Analysts seem to be convinced of AMD's resurgence. Particularly after the company's third-quarter earnings release, analysts have scrambled to lift their price targets for the shares.

RBC Capital Markets analyst Mitch Steves recently upped his price target for AMD shares from $44 to $50.

AMD was at the receiving end of further love from Wall Street last week, with Cowen analyst Matthew Ramsay hiking his price target from $40 to $47 following his meetings with CEO Su.

On Nov. 19, Wells Fargo Securities raised its price target from $40 to $48.

AMD Primed For Further Gains?

AMD's product focus and innovation bode well for the stock, notwithstanding the stretched valuation of shares. The Street-high estimate for the shares is $52, suggesting an incremental 25% upside.

That said, the average analyst price target is $35.57, according to the Yahoo database. 

Given the apprehension regarding valuation, any pullback in shares could present a buying opportunity.

AMD is likely to benefit from its strong roadmap and CPU share gain opportunity, Bank of America Merrill Lynch analyst Vivek Arya said in a recent note. 

Arya has an Outperform rating on shares of AMD and a $44 price target.

AMD shares were down 0.27% at $39.30 at the time of publication Friday. 

Related Link: Nvidia Impresses Analysts With Datacenter Resurgence, Expanding Margins