When a stock market index loses 20% of its value from its all-time high, it has officially transitioned from a bull market to a bear market. It tends to happen every 3.6 years (on average), and both the broad S&P 500 index and the tech-heavy Nasdaq-100 index have crossed that threshold in 2022.
It’s not easy to navigate these market conditions, and investors are understandably jittery. But they shouldn’t be, because ignoring short-term noise by taking a long-term focus is one key to generating positive returns.
Still, investors are monitoring the financial health of consumers and the strength of the U.S. economy to determine whether a stock market turnaround is imminent. On Aug. 4, Advanced Micro Devices (AMD 1.86%) will release its earnings report for the second quarter of 2022, and it could give investors the clues they’re looking for.
AMD serves both consumers and businesses
Advanced Micro Devices is one of the most highly regarded producers of advanced computer chips (commercially known as semiconductors) in the world. Consumer products and services increasingly rely on digital capabilities, so their appetite for more processing power is only growing. That has sent demand for semiconductors soaring in recent years.
AMD’s hardware serves a diverse variety of purposes, which means the end users are a healthy mix of both consumers and businesses. That’s why the company’s upcoming second-quarter results could provide some important insights into the broader economy.
For example, AMD’s enterprise, embedded, and semi-custom business unit is responsible for the chips in both Sony‘s PlayStation 5 and Microsoft‘s Xbox gaming consoles, in addition to Microsoft’s Surface line of notebook computers and tablets. But that same segment also serves the world’s leading providers of cloud computing services, like Amazon and Alphabet‘s Google.
In the first quarter of 2022, enterprise, embedded, and semi-custom generated a record $2.5 billion in revenue, which represented 88% year-over-year growth. The second-quarter results will be very telling for a couple of reasons. Are tech companies accelerating their investments in their cloud platforms? If so, it could mean they are confident about the strength of the economy.
Similarly, if AMD reveals increased chip demand for the aforementioned consumer products, then perhaps households are managing high inflation and rising interest rates better than investors expected.
Don’t forget about the long term
Despite the usefulness of AMD’s upcoming earnings report on Aug. 4, it’s important that investors focus on the big picture.
Between 2016 and 2021, AMD grew its total revenue at a compound annual rate of 31%. While that’s incredibly impressive, analysts are betting the company will generate $26.2 billion in sales for the 2022 full year, which would mark a rapid acceleration in growth to 59% year over year.
It’s partly thanks to the recent acquisition of Xilinx, which could contribute about $4 billion to AMD’s revenue this year. Xilinx is a global leader in adaptive computing, which AMD predicts will be the next frontier in semiconductor hardware. It’s a revolutionary technology that adjusts to the user’s requirements in real time, reducing the need for constant physical chip upgrades.
Together, AMD and Xilinx now lead the high-performance computing industry, and they’re chasing a $135 billion opportunity.
AMD stock is a great value
Setting AMD’s upcoming Q2 results aside, the company has generated $4.3 billion in non-GAAP net income (profit) over the last four quarters, which translates to $3.41 in earnings per share. That places its stock at a price-to-earnings multiple of 26.2, which is roughly in line with the Nasdaq-100 index’s multiple of 24.6.
But AMD stock has declined by 41% in 2022 alone, alongside the broader tech market sell-off, so it’s materially cheaper than it was a short time ago. Yet even accounting for that loss, it has still generated a return of 530% over the last five years, which really highlights the importance of taking a long-term view, irrespective of the company’s upcoming results. For context, that return is five times greater than the Nasdaq-100’s return over the same period.
Investors should learn what they can about the economy from AMD’s Q2 report, but they should stay focused on where the stock might be a decade from now. (Hint: It will probably be much higher than where it is today.)
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool has a disclosure policy.