Advanced Micro Devices, Inc. (AMD) Stock Can’t Afford a Shootout

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After being the laughing stock of Wall Street for several years, Advanced Micro Devices, Inc. (NASDAQ:AMD) enjoyed a stunning 2016. In that banner year, AMD stock returned a gargantuan 309%. In the history of AMD as a publicly-traded entity, that was the greatest performance ever. With shares back in a positive light, investors are naturally hoping for a repeat effort.

Advanced Micro Devices, Inc. (AMD) Stock Can't Afford a Shootout
Source: Shutterstock

On the surface, the bullish argument for AMD stock is logical, even tempting. Only five other times besides last year did Advanced Micro Devices return triple-digit profits. No other time besides 2009 produced a 300% gain.

To be fair, last year’s massive rally was far more impressive than the 2009 rally simply because everybody was in “recovery mode” from the Great Recession. Between 2010 through the end of 2015, the average annual return for AMD stock was -13%.

Thanks to the 309% slingshot, however, Advanced Micro Devices now claims nearly 33% returns for the current decade. If you look up the phrase “paradigm shift,” you’ll find a picture of the AMD logo. Thus, the belief in a repeat performance is not out of the question.

But the circumstances surrounding AMD stock and the broader semiconductor industry reminds me of something my friends always tells me: “You can wish in one hand, and poop in the other…which one will fill up faster?”

AMD Stock Races to the Bottom

Criticizing AMD stock is a tough business due to the vitriol it arouses from its fan base. InvestorPlace contributor Nicolas Chahine had to justify even writing about a short trade on AMD. I suspect this has something to do with the chipmaker’s close relationship with gaming guru Sony Corp (ADR) (NYSE:SNE). After all, gamers wield considerable leverage, as evidenced by sales of the classic Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) console.

Buyers can’t exist without sellers. The irony, of course, is that the markets are like a game. In the game of semiconductors, we can’t all play Mario — somebody has to be Luigi. Analysts have attributed the industry’s comeback to the easing of a supply glut. Although it’s a tremendous boost for AMD stock, it’s only part of the story. The critical driver is that semiconductors are in a race to the bottom.

Semiconductor production, AMD
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Source: Source: JYE Financial, unless otherwise indicated

Simultaneously, according to the Board of Governors of the Federal Reserve System, industrial production of semiconductors has been rising vigorously. Again, this is completely normal, and is what you want to see.

To feed demand, however, firms like AMD must meet it at lower and lower prices. Obviously, that puts tremendous pressure on margins. But it also sets the stage for power players like Intel Corporation (NASDAQ:INTC) to cannibalize the industry.

AMD Risks Getting Shoved Out

Here’s something we can all agree on — Wall Street is a battleground. With semiconductors, not enough business exists to satisfy every player. If it did, the PPI wouldn’t slide the way it has. In that circumstance, we can expect rivals to price each other down. This is exactly what OPEC tried to do with the shale gas sector.

Sometimes, the strategy works, and other times, it doesn’t. But the critical takeaway is that no company escapes unharmed from deliberate cannibalization. This is where we have to consider the financials for AMD stock.

To put it bluntly, Advanced Micro Devices does not have the firepower to duke it out with other semiconductors. It has a high-debt burden, its margins are junk and sales growth isn’t that impressive when you look at the broader picture. Fundamentally, AMD stock is moving from one distressed state to another.

Some analysts might suggest focusing strictly on the technical momentum. For me, that’s extremely difficult to do, considering that AMD’s competitors will exploit its vulnerabilities if push comes to shove. But even for argument’s sake, the technicals aren’t encouraging. Since the opening price of March, AMD stock is down nearly 15%.

If you want to take a speculative swing at AMD, the choice of course is yours. But I suggest looking at the hard reality of both the company and the industry. Semiconductors can make or break you. Given the sector’s volatility, I’d prefer going with the best names, or the names that can take a few shots.

As of this writing, Josh Enomoto was long SNE stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/advanced-micro-devices-inc-amd-stock-cant-afford-a-shootout/.

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