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Advanced Micro Devices (NASDAQ:AMD) recently received unconditional antitrust approval in the European Union for its $35 billion acquisition of Xilinx. AMD shares finished the week of June 28 up 10.6% and could be on the verge of heading to new highs. 

Analyst Hans Mosesmann with Rosenblatt Securities has a $135 price target on the stock, representing more than 40% upside to AMD’s price of $94 at the time of writing.

While Mosesmann’s price target is the highest among Wall Street analysts covering the stock, AMD has clear catalysts on the horizon, including the closing of the Xilinx deal and a strong environment for PC sales that could push the shares higher in the second half of 2021.

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What Xilinx brings to AMD

AMD is on track to complete the Xilinx deal by the end of this year. Xilinx is a leader in field-programmable gate arrays (FPGAs), adaptive system on chips (SoCs), and other adaptable processing technology that allows customers to optimize hardware for specific applications across a broad range of industries from aerospace to the data center. 

The combined company will help AMD put more pressure on Intel. AMD has been beating the chip giant in the server market over the last few years. It’s estimated that AMD gained a few points of server market share in the first quarter. One analyst expects the company’s server share to reach 25% by next year ahead of AMD’s launch of its “Zen 4” 5-nanometer chip. 

With Xilinx, AMD’s growth opportunity will expand to new markets, such as programmable chips for 5G edge computing. The company estimates its total addressable market will be $110 billion once the deal is complete. Long-term, management expects to deliver compound annual revenue growth of 20%. The acquisition will also be immediately accretive to AMD’s bottom line. The combined company will have $11.6 billion in annual revenue and $1.8 billion in free cash flow

However, investors could justify buying the stock based on strong demand trends for AMD’s CPUs and GPUs.

Robust demand for PCs and game consoles

It’s been a strong start to the year for PC shipments. Intel said it shipped more notebook CPUs in Q1 than in any other quarter in its history. AMD has been gaining market share on Intel in the x86 desktop CPU market in recent years, so a healthy demand environment for PCs and notebooks is great news for the underdog. 

AMD reported a 93% increase in revenue in Q1, driven by strong demand across the business. The new Ryzen 5000 series mobile processors have ramped twice as fast as the previous generation. In the enterprise, embedded, and semi-custom segment, revenue surged by 286% year over year in the first quarter, driven by demand for EPYC server processors and the new game consoles from Sony and Microsoft, which run on custom chips from AMD.

AMD CEO Lisa Su doesn’t see demand slowing down. During the Q1 earnings call, she said, “We significantly accelerated our business in the first quarter and now see higher growth for the year, driven by increased customer adoption for our products, overall market strength, and additional supply from our supply chain partners.” 

AMD expects revenue to advance by 86% year over year in Q2, or an increase of 4% sequentially over Q1. Previously, management had called for full-year growth of 37% but based on the momentum through the first quarter, management is now calling for revenue to jump 50% in 2021. 

A strong case for more gains

The raised guidance suggests incredibly strong demand trends across consumer PCs, gaming, and data center right now. AMD’s revenue and profit growth has accelerated over the past year, and the addition of Xilinx’s adaptable hardware solutions will give AMD plenty of new growth avenues starting in 2022.

Analysts are currently projecting AMD will increase earnings per share by 68% this year before improving by 24% over each of the next two years through 2023. AMD’s current forward price-to-earnings-growth (PEG) ratio of 1.44 is less than NVIDIA‘s (NASDAQ:NVDA) PEG of 3.7 and leaves room for further gains if the company meets those expectations.

Moreover, AMD seems to have a free ride to greater market share in the server market for the time being, since Intel’s 7-nanometer CPUs are not expected to be available until 2023. 

Meanwhile, AMD’s stock price has been hovering just below $100 for the last year, even though revenue growth has accelerated. Some investors might prefer to stick with industry leader NVIDIA, especially because NVIDIA has plans to launch its own data center CPU in 2023. But with plenty of catalysts on the horizon, it’s hard not to see further upside for AMD stock over the next few years. Rosenblatt’s $135 price target looks reachable from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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