Advanced Micro Devices is a fast-growing semiconductor company, with strong industry tailwinds.

Because of its high valuation I’m neutral about the stock at current price. (See Insiders’ Hot Stocks on TipRanks)

AMD Promotes Healthy Growth

AMD, the world’s leading semiconductor manufacturer, uses a fabless model to operate. It designs chips and then has them manufactured by foundries like Taiwan Semiconductor.

Because this business model relies on assets, capital expenditures tend to be low. That results in a strong conversion rate of free cash flow.

AMD, on the other hand does not realize as much value throughout the product chain as other chip companies. AMD also depends heavily upon foundries like Taiwan Semiconductor.

AMD may feel the effects of these price hikes, such as Taiwan Semiconductor recently did.

AMD’s strong product portfolio has allowed it to grow its revenues and profits strongly over the past few years and the last two quarters.

AMD’s remarkable growth is due in part to growing semiconductor demand across the globe. However, the company has also benefited from increased market share, which enabled it to grow at a higher rate in certain segments like Data Centers.

AMD managed to increase its revenues by over 100 percent in the past quarter to $3.9 billion. That’s well ahead of analyst expectations.

AMD’s core segment, PCs, Data Centers, Gaming, was able to drive this huge growth. While all of these markets saw growth in recent years due to COVID tailwinds, it would have not been enough to allow AMD to double its revenues. Market share gains in the core segments had an even greater impact.

AMD managed to improve its gross margins by 400 base points. It was also able to improve its operating leverage, which is the ratio of sales expenses and administrative costs. AMD saw its GAAP net profit increase by several hundred percent from $157m to $710m during the last quarter, which was a decrease relative to the bottom line.

AMD forecasts $4.1 billion revenue in the third quarter. This is a positive outlook that will lead to another sequential rise.

The company should see Q3 as another strong quarter, with higher revenue growth and greater margin tailwinds.

It’s a bit expensive to buy shares

AMD’s share price of $106.45 has dropped a little over the past few months. In August, shares reached $122.49 at their peak.

AMD’s shares are not at an extremely low value, even though they trade at the current share price. AMD trades at 38.7x expected net profits this year based on the current earnings per share estimate for next year at $2.50 AMD is a bit more expensive than the $3.07 expected net profit per share for next year, however, it can’t be called cheap. The 2022 earnings multiple at 34.7

While AMD’s high growth seems to justify the premium, it is still uncertain whether shares will ever trade at such a high valuation.

Wall Street Take

On Wall Street, AMD is rated Moderate Buy based on 11 Buys, 3 Holds and 1 Sell that were assigned within the past three month. The average AMD price target is $116.21 and implies 9.2% upside potential.

Disclosure: Jonathan Weber held a position at the Taiwan Semiconductor Manufacturing Company for a considerable time prior to publication.

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