Up 640% in the last twelve months, is it time to book profits in AMD stock?

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Shares of Sunnyvale, California-based Advanced Micro Devices, Inc. (NASDAQ:AMD) have been on a run, a massive run, in fact. AMD stock is up by 640% over the last twelve months, and if that doesn't see your eyes pop, nothing ever will. Even as many investors could be lured into taking profits off the table, it's prudent to ask the question, "What next for AMD stock?" While a repeat of the last twelve months performance seems extremely unlikely, could AMD still be a multi-bagger stock even today? We believe AMD stock could still be a multi-bagger and here's why.

AMD's Total Addressable Market Over $53B.

In order to understand the opportunity ahead of the company, we need to look at the total addressable market which AMD can target with its various products. Here, it will help to take a look at AMD's Q4 2016 investor presentation from a few months ago. In a November 2016 investor presentation, the AMD management had outlined the following vision:

• Graphics segment - Number one in Visual Computing.
• Computing segment - Strong Number 2 in Computing.
• Broadening their technology reach in Semi-custom and vertical platform solutions.

However, it was another part of the investor presentation which should excite investors. The company identified Gaming, Datacenter and Immersive platforms as growth opportunities with a total addressable market (TAM) of $15B+, $18B+ and $20B+, respectively for the three segments. This brings AMD's has TAM to $53B. Having identified the opportunity, the next big question is how much share can AMD capture in each of these markets?

How Much of this Market Can AMD Take?

In the recent Q4 2016 earnings call, this is what AMD CEO Lisa Su had to say, with reference to 2017. "We enter 2017 with strong revenue growth and margin expansion opportunities as we prepare to launch our "Zen"-based CPUs and Vega GPUs that can return AMD to the high-performance markets where we have not materially participated in recent years." With a set of extremely competitive products set to be launched, AMD should be able to account for a greater share of the segments it sees as growth opportunities.

Based on research data from Mercury research, AMD's share of the total GPU (Graphics) market has hovered between a 10% to 20% over the last few years. As per AMD's classification, 'Gaming' includes gaming PC components, consoles, casino gaming, and other consumer gaming systems and 'Immersive Platforms' includes PC components, workstation graphics, virtual and augmented reality solutions, digital signage, thin clients and other visually-intensive embedded systems. Assuming the company can manage to hold onto a 15% share in the coming years, the company can generate annual revenues of nearly $5.3B from the Gaming and Immersive platforms.

The 'Datacenter' segment includes enterprise servers, networking, storage, and HPC and here AMD will be competing to get their hardware into the data centers. AMD's server market share has been less than 1% with Intel clearly bossing over its smaller rival with a nearly 98% share. AMD push to grab a larger share of the data center market will be boosted by efforts to capture a greater share of the server market. To further this, the company had signed a JV with Tianjin Haiguang Advanced Technology Investment Co. to develop chips for server systems to be sold solely in China. This JV should propel AMD's share of the server market in China. The data center market in China is expected to grow rapidly over the next 4 years and AMD has certainly worked itself into a position of strength. The Datacenter revenues could also be boosted by the introduction of a CPU+GPU server chip or server SOC. Quoting Dr. Lisa Su from the recent earnings call, "It's fair to say we do believe we can combine a high-performance CPU with the high-performance GPU." All in all, given the strong business dynamics working in AMD's favor (only competitive single provider of CPU's as well as GPU's), as well as the recent moves by the management, a 20% share of the growing data center space looks likely, which puts the potential data center revenue at $3.6B.

AMD can in effect generate annual revenues of $8.9 B from its Total addressable markets. This compares against a revenue of $4.27B in the last 4 quarters. Based on the current management commentary and the product launch roadmap of AMD, the company could reach this revenue run rate within the FY 2019 timeframe. AMD stock currently trades at a Price-to-sales ratio of 2.9 (based on Feb 14 closing price). Using the current multiple to value the stock gives a target price of $25.8, implying an upside of nearly 95% from its last closing price. However, there could be a potential upside to this from higher margin products, something which has also been reflected in the management's recent commentary and will be covered in a separate follow-up post.

Putting it all together

AMD stock has had a massive run over the last twelve months. The huge run up in AMD stock price can lure investors into booking profits. However, before selling AMD stock, investors would do well to look at where the stock could be headed. Based on the management commentary and the growth opportunities ahead of the company, AMD stock could continue to move higher over the coming months. Hence, long-term investors should continue to accumulate AMD shares on every dip in order to benefit from the possibility of a multi-year rally in the AMD stock price.