AMD is Revolutionizing the Gaming Industry at Just the Right Time

Two months ago, tech companies were universally loved. It made sense: They all looked the same. Then, the COVID-19 pandemic hit and the overall sector took a beating.

Despite the market crash, there happens to be a diamond in the rough I want to point out.

That gem is Advanced Micro Devices (AMD), which sprinted to an 8% gain Monday. Analysts like the prospect of a recovery in gaming revenues. Data centers are another big part AMD’s business. They began perking up, too

Unlike most of the technology sector, the Santa Clara, Calif., company is in the right markets with the right products at the right time.

As a business, AMD is executing exceptionally well. In March of 2019, managers announced that the company won a contract to supply high-performance graphics processing units (GPUs) to Google data centers. A few months later, a corporate press release touted that AMD graphics chips would be prominently featured in the next generation of Microsoft’s Xbox gaming consoles.

These are huge wins for a company that has always lurked in the shadows of its larger competitors, like Intel (INTC) and Nvidia (NVDA). The small company is showing that it can compete and win market share with great products for a terrific price.

Managers bet the company on cloud-based data processing and a gaming upgrade cycle. Now those markets, triggered by the coronavirus, are booming.

However, the first actual concrete evidence of the linkage between the pandemic, data center and gaming chipset demand emerged during an investor presentation from Micron Technology (MU). In March, the company reported second-quarter financial results at the high end of expectations.

Sanjay Mehrotra, the CEO of Micron, noted that demand from data centers was up sharply across all regions due to IT infrastructure companies upgrading equipment in response to the remote-work economy. Simply put, the WFH trend — that’s work from home — is also upping demand for gaming electronics.

It makes sense, video games and staying inside go together like peanut butter and jelly. And Cheetos.

The uptick in demand for the high-end game GPUs was the basis on Monday for an upgrade at Bank of America. An analyst at the investment firm notes that 57% of AMD’s gamer clients currently have legacy equipment. Its latest Big Navi GPUs, which are used in gaming PCs, are gaining favor quickly and are a likely upgrade, according to the firm.

Data centers and gaming were growing businesses ahead of the pandemic. However, social distancing is leading to profound shifts in the way consumers use technology. Now, they are gaming more. They are also working from home more, further taxing data center infrastructure.

AMD’s low cost and high-performance GPUs are logical beneficiaries.

Shares have performed well in 2020. The stock is up 3.6% year-to-date. During the past 12 months, AMD shares have gained 66.5%. The best is yet to come.

Shares are now hovering just below $50. I expect a rally to at least $57 over the next several weeks. That 26% move higher would put the stock modestly below the record high achieved in February.

Investors should look for weaknesses as opportunities to get in before prices rise even higher.

Best wishes,

Jon D. Markman