AMD’s stock powers up toward 13-year high, as Microsoft’s new Xbox provides a boost

Shares of Advanced Micro Devices Inc. powered higher in active trade Monday toward a 13-year high, boosted by Microsoft Corp.’s announcement that its next-generation Xbox gaming console will use AMD chips.

MicrosoftMSFT, +1.17% said over the weekend that “Project Scarlett,” the code name for its new Xbox console that is set to arrive during the 2020 holiday season, will be powered by “custom-designed” AMD processors. Microsoft said the new Xbox will allow users to stream games from their Xbox One consoles to a mobile device.

“While AMD’s positioning in Microsoft’s next-gen Xbox has been expected, we think this should still be considered positive as it reinforces AMD’s positioning in the high-end processor and graphics market for game consoles (Microsoft’s ‘Project Scarlett’ and Sony’s PS5 consoles),” analyst Aaron Rakers at Wells Fargo wrote in a note to clients.

AMD’s stockAMD, +3.64% surged 3.3% in active afternoon trading, putting it on track for the first close above the $33 mark since May 2006. The stock had traded above $33 intraday in September 2018, reaching a high of $34.14 on Sept. 13, but could only close as high as $32.72 on Sept. 14.

It has now rocketed 81% year to date, while the PHLX Semiconductor IndexSOX, +2.94% has hiked up 23%, the Nasdaq CompositeCOMP, +1.32% has climbed 18% and the S&P 500 indexSPX, +0.69% has advanced 15%.

Trading volume topped approached 80 million shares, making AMD’s stock the most actively traded on major U.S. exchanges.

Don’t miss: AMD stock jumps as Morgan Stanley throws in the towel on ‘obviously’ wrong bearish call.

Bank of America Merrill Lynch analyst Vivek Arya highlighted three implied positives for AMD from its partnership with Microsoft:

A “solid” 2020 outlook for AMD’s semi-custom/console business, which represents 20% of sales.

Potential for “better” pricing/margins than the prior console refresh cycle in 2013, when AMD was in a more difficult financial situation.

Potential for enhancing the Microsoft/Sony partnerships via cloud streaming projects.

But Arya said his bullishness on AMD, which he rates buy with a $35 stock price target, goes beyond the boost from Microsoft. At the BofA Merrill Lynch Global Tech conference last week, he said AMD management “expressed the most confidence” about the second-half of the year, as it ramps its 7 nanometer servers, PC and graphics chips.

See related: AMD stock jumps 10% after detailing new PC push at trade show.

“While the overall macro and cyclical environment remains uncertain for most semis, AMD remains confident that its rollout of multiple new products…should drive outsized growth in the 2H,” Arya wrote in a note to clients.

Regarding concerns over competition from Intel Corp., Arya said he didn’t expect pricing will be the first level Intel pulls, as customers care more about performance than cost of ownership.

While AMD’s stock and the broader chip sector have soared this year, Intel sharesINTC, +1.96% have slipped 0.2% over the same time, and remain 20% below the April 22 closing high of $58.82.

And regarding the macro uncertainties, Arya said he noticed “greater than usual interest in semis” at the tech conference, “likely due to the ‘fear of missing out (FOMO)’ on any quick recovery in semi stocks.

Although investors have largely given up on any hopes for a quick resolution to the U.S.-China trade war, as long as the trade issues don’t get worse, “there is a sense that the supply chains can/have adjust(ed) appropriately,” and there could be value in certain stocks with company-specific drivers, Arya said, which would include AMD.

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