Investing in corporations that are riding the wave of enduring industry progression can present lucrative prospects. Among such advantageous ventures are enterprises in the semiconductor and software sectors. I’m eyeing Advanced Micro Devices and Constellation Software as potential investments primed for long-term appreciation. Currently, shares of Advanced Micro Devices stand as a compelling investment proposition.
With recent developments causing the stock to depreciate by 50% from its prior peak, the shares currently trade at 29 times estimated future profits. Such an appraisal appears significantly undervalued for a corporation that recently exhibited a striking 55% annual increase in its adjusted profits during the initial quarter of the fiscal year.
Having its niche as the second top supplier of Graphics Processing Units (GPUs), AMD operates in the shadows of Nvidia, the long-standing leader of the GPU arena for the last two decades. However, we predict AMD to regain a portion of the market share. This potential rise is driven by the increasing demand in data centers for reasonably priced yet powerful and efficient microchips.
The income derived from data centers experienced a staggering 57% annual increase in the past quarter, and this is prior to AMD’s acquisition of ZT Systems. The consolidation allows AMD to furnish data centers with AI computing systems at a rack level that integrate AMD’s GPUs, CPUs, networking chips, and software. This development is predicted to attract increased business interest from large-scale cloud operators.
In the first quarter, Amazon unveiled a significant investment in AMD, amassing shares worth $84 million. Concurrently, Amazon Web Services (AWS) introduced a range of novel AI workloads that run on Amazon Elastic Compute Cloud (EC2), which makes use of AMD’s EPYC processors and Xilinx field-programmable gate arrays (FPGAs) that it claimed in 2022.
During the first quarter earnings call, AMD reported that every prominent cloud provider is deeply engaged in incorporating its EPYC Turin processors, implying a bright future for its data center enterprise. Despite formidable competition from Nvidia and other chip manufacturers, Amazon’s substantial investment signifies AMD’s continuing relevance and influence in the semiconductor supply chain.
Furthermore, AMD has demonstrated competitive resilience in the PC market by gaining ground against Intel with its Ryzen CPUs. Considered alongside the other considerable business prospects, current circumstances present a compelling justification for considering an immediate stake in the stock.
Switching gears to Constellation Software, this Canadian company is a growth stock that has shown an impressive performance over the past decade. Yet, it often escapes the gaze of Wall Street. Constellation operates in the specialised software sector, catering to niche markets with products like record keeping and payment scheduling solutions.
The surging growth of this sector has played a significant role in escalating Constellation’s shares by more than 200% in half a decade. A considerable portion of this financial performance is linked to the management’s harmonized and intuitive deal-making strategies.
Emulating Warren Buffett’s approach to growing Berkshire Hathaway, Constellation adeptly redirects the free cash flow generated from its existing software ventures towards acquiring new businesses. These new acquisitions consequently expand their revenue stream and bolster the cash flow.
In their acquisition strategy, Constellation targets rapidly expanding software companies that are profitable with excellent management at the helm. Once bought, Constellation enhances their performance, which fetches higher returns for its shareholders.
Investments in the vertical software industry exhibit strong potential. Companies in this sector generally operate without significant threat from large software providers like Microsoft, due to the tailored niche solutions they offer. Constellation’s business model zeroes in on enterprises providing customized software products tailored for industry-specific needs, cementing their strong market position.
Such enterprises are wide-moat entities with a potential for long-term growth. Revenue and free cash flow have seen a compounded annual growth rate of approximately 20% over the last decade. The first quarter of the current year saw the company’s revenue grow by 13% year-over-year, accompanied by a free cash flow upsurge of 14%.
Speculation from Future Market Insights projects the vertical software industry to cross the $150 billion mark very soon, and envision an annualized growth rate of 13%. This indicates that the industry size will swell to over $500 billion by 2034. Currently, Constellation’s yearly revenue barely crosses $10 billion, indicating significant room for growth and substantial prospective gains for present investors.