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Tech Sell-Off: Down 23%, This Beaten-Down Stock Is a Terrific Buy Right Now

Share prices of Advanced Micro Devices (NASDAQ: AMD) have dropped off a cliff in the first month of the new year, losing 23% of their value so far as investors have pressed the panic button amid a broader sell-off in tech stocks.

AMD's predicament results from rising inflation, as well as the possibility of as many as four interest rate hikes by the Federal Reserve in 2022. That has led investors to shift money away from richly valued, high-risk companies to safer assets such as bonds. However, AMD stock's correction presents a great opportunity for investors to add a potential long-term winner to their portfolios on the cheap, especially considering that it is likely deliver a solid set of earnings results on Feb. 1.

Let's see why AMD could crush expectations and regain investor confidence with its fourth-quarter earnings report release on Tuesday.

Image source: Getty Images.

AMD could surprise Wall Street

AMD expects $4.5 billion in revenue for Q4 2021 at the midpoint of its guidance range, which would translate into a 39% year-over-year increase. The chipmaker forecasts an adjusted gross margin of 49.5% for the quarter, which would be a nice jump over the year-ago period's reading of 45%.

Analysts expect AMD's non-generally accepted accounting principles (GAAP) earnings to increase to $0.76 per share in Q4 2021 from $0.52 per share in the year-ago period. However, it is worth noting that AMD has crushed Wall Street's expectations in each of the last four quarters and has consistently raised its guidance, thanks to the strength across all its business segments.

The company anticipates its 2021 revenue to jump 65%, a huge bump over its original guidance issued in January 2021, for a 37% increase in annual revenue. It won't be surprising to see AMD exceed expectations once again and deliver robust guidance for 2022 on the back of solid demand for server processors and graphics cards.

Mizuho Securities estimates that AMD exited 2021 with 20% to 25% share of the server processor market. According to Mercury Research, that points toward a huge gain as the chipmaker reportedly controlled just 7.1% of that market at the end of 2020. Another estimate from market research firm Omdia points out that AMD controlled 16% of the server central processing unit (CPU) space in the second quarter of 2021.

These third-party estimates indicate that AMD's server market share increased substantially during the year. Total server sales were expected to increase 11% last year to $92 billion, so AMD's gains and the market's expansion should pave the way for growth in the company's top line.

Meanwhile, AMD is also gaining ground in the data center graphics processing unit (GPU) market, where sales more than doubled year over year in the third quarter of 2021. The company anticipates strong year-over-year growth once again in Q4 while pointing out that this business will continue to be a growth driver in the coming years.

More importantly, AMD has secular catalysts that could help sustain its impressive growth in the long run.

Focusing on the bigger picture

Analysts expect AMD's earnings to grow at an annual pace of 38% for the next five years, which isn't surprising as the markets it operates in are set for secular growth. For instance, Microsoft and Sony have reportedly shipped a combined 21 million units of their latest gaming consoles within a year of their launch in November 2020.

Now, Sony expects to sell 100 million units of the PlayStation 5 console over its lifetime. Microsoft's Series X and Series S are its fastest-selling generation of consoles, indicating that they could eventually exceed the Xbox 360's lifetime sales of 85 million units. AMD supplies the custom chips that power these consoles, so it still has a lot of room for growth in this market.

Meanwhile, the Dell'Oro Group estimates that server spending is on track to grow at an annual pace of 11% through 2025, which bodes well for AMD given its improving market share in this space. In all, AMD is sitting on multiple growth drivers that should help it clock strong revenue and earnings growth, both in the near term and long run.

What's more, the stock is trading at 34 times trailing earnings now, which is a discount to its five-year average earnings multiple of 112 and 2021 earnings multiple of 44. Given its growth potential, buying AMD before its earnings report looks like a good idea as investors can get into this growth stock at a relatively cheap valuation right now.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Microsoft. The Motley Fool has a disclosure policy.


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