AMD

AMD surged 3% Monday after RBC Capital Markets initiated coverage with a "buy" rating.

The bank says AMD is a better buy than Nvidia, and placed a $40 price target on the stock.

Watch AMD trade in real time here.

RBC Capital Markets on Monday initiated coverage of Advanced Micro Devices (AMD), saying the stock is trading at a "notable discount" compared to its semiconductor competitor Nvidia.

Analyst Mitch Steves based his $40 price target — which is tied for the highest on Wall Street and a more than 30% premium to Monday's price — on AMD's growing server market share, continued demand for its high-end gaming chips, and solid operating margin.

"We think AMD can capture a larger portion of the server market growing to mid-singles and working towards 20%+, similar to dynamics last seen in 2006," Steves said in a note to clients. "Despite positive news surrounding 7nm chips from TSMC, we think server market growth is still undervalued."

He continued: "While we think the stock will remain volatile, we note that AMD trades at a notable discount on a sales basis relative to peer NVDA."

AMD shares rose as much as 3% following RBC's initiation on Monday.

"In our view, the success of AMD’s server product combined with stable/growing gaming demand should lead to positive cash flow and a cleaner balance sheet going forward," Steves said.

On the gaming front, AMD is up against steep competition from Nvidia, which recently integrated real-time ray tracing on its newest chips, an advanced method of rendering movie-quality graphics. Luckily, the entire segment is primed for growth, thanks to an increased demand for high-end GPU chips, RBC says.

"With these long-term positive dynamics in mind, we think this should allow AMD to grow at double digits within its C&G segment," Steves said.

"While a few comparisons will be difficult (1Q2018 saw outsized crypto currency-related revenue), we think it’s a blip in the story given the secular tailwinds for computing & graphics."

AMD shares have surged 189% this year, fueled by a new data-center chip geared towards CAD software and strong earnings results.

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