Advanced Micro Devices Inc. (NASDAQ:AMD) is a good little company that designs fast microprocessor chips and has niches in gaming, with its Radeon graphics and in low-priced PC hardware, with Ryzen. CEO Lisa Su and her team have done a great job. But that’s not how an AMD stock investor should look at it.
As I explained last month, it’s relative valuation that counts: the value of the company’s activities relative to what should be its value in the market.
Early in 2016, at $2 per share, Advanced Micro Devices was woefully underpriced. Last month, it was over-priced. Since my March article, it’s down nearly 12%. It will next announce earnings May 1, and analysts expect a loss of 3 cents per share on revenue of $982.55 million. That’s a slightly bigger loss, on a lot less revenue, than in the Christmas quarter. Semiconductors tend to be seasonal. The company is well-managed.
So, naturally, what analysts now want you to do with AMD stock is sell, sell, sell.
What Is the Natural Value of AMD Stock?
The analysts who are screaming sell expect a decline in the general market, and the danger signs of heavy weather coming are everywhere. A crazy, dysfunctional government, an unsettled international situation, a recovery that has gone on for 8 years and is due to roll over — the signs are obvious, their portents heavy.
But why sell AMD stock? It’s because Ryzen is a lot like past generations of Advanced Micro Devices chips. It costs less than Intel Corporation’s (NASDAQ:INTC) chips, yes, but it only delivers just as much performance. If you squint. It offers good value if you’re doing office work, but for gaming, which is where you push the envelope in PCs these days, it doesn’t quite measure up to the best from Intel.
Putting a value on AMD thus becomes difficult. You could draw a line from 2015’s $3.9 billion in sales to 2016’s $4.3 billion, assume a small profit of 8 cents per share on $4.74 billion of revenue for 2017. That’s what the average analyst is estimating, with a hold rating.
Goldman Sachs, on the other hand, put out a sell rating on April 6, expecting a 20% drop.
AMD stock got half of that drop overnight: the shares went from $14.18 to $12.83 between the close April 5 to the end of the first hour of trading on April 6. You can do that if you’re Goldman Sachs. You’re in the business of making stocks move.
Advanced Micro Devices: Bargain Or Basement?
The Goldman Sachs hit made AMD look attractive to InvestorPlace contributor Richard Saintvilus, who believes the shares can hit $16.
Give or take a few cents here and there, God willing and the creek don’t rise, he could well be right.
But Advanced Micro Devices is not a company I invest in for the long haul. It’s a company I speculate on. I buy AMD stock when everyone has trashed it, and sell it when everyone falls in love. It is a minnow in a sea of sharks, and while its gains will always look great on a relative basis, because it’s small, it’s still a minnow.
Then there is the general outlook for semiconductors. Intel is down for the year, although there’s a nice 3% dividend to keep you dry. Nvidia Corporation (NASDAQ:NVDA) recently rolled-over to the downside. So have Texas Instruments Incorporated (NASDAQ:TXN) and Analog Devices, Inc. (NASDAQ:ADI).
In the world of clouds and devices, hardware is going to remain cheap. Cheap as chips, the Brits might say. Chips must be designed, then manufactured, over the course of several years. The profits just don’t scale as in hardware the way they do in, say, software, which can be written once and scale everywhere overnight.
If you like hardware, in other words, there are safer places to be than AMD stock. Except as a defensive play, with dividends, I don’t like hardware.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in INTC.
