It hasn’t been a good month for Advanced Micro Devices, Inc. (NASDAQ:AMD). In fact, the past couple of months have been downright unkind. AMD stock has declined 18% over the past month — with increased volatility — and fallen 30% from late February highs.
I’ve generally been bullish on AMD stock, but the past few weeks in particular have changed my opinion somewhat.
The recent moves in Advanced Micro shares aren’t simply short sellers pushing the stock down, or “weak hands” taking profits after a huge run. There has been a reasonable amount of material news over the past few weeks.
The problem for AMD stock is that most of said news hasn’t been particularly good.
The Advanced Micro Devices-Intel Partnership Isn’t
The biggest swing for AMD came in mid-May, before and after the company’s analyst day.
Advanced Micro Devices stock gained almost 12% ahead of the meeting. The catalyst for the move was a report that Intel Corporation (NASDAQ:INTC) was signing a licensing deal with AMD for graphics technology. Intel’s deal with Nvidia Corporation (NASDAQ:NVDA) expired in March. A similar deal with Advanced Micro Devices would add roughly 5% to AMD revenue. But the profit contribution would be far higher, given that licensing revenues offer extremely high margins.
The optimism lasted less than 24 hours.
At the analyst day, Advanced Micro’s management didn’t mention any licensing deal — even though the meeting would have been the logical place for such an announcement. The following day, AMD stock gave back its gains, and then some.
At this point, the long-hoped for partnership appears pretty much dead. Intel has denied the initial report. Analysts increasingly suspect Intel will go it alone. That’s not a death knell for Advanced Micro Devices, to be sure. But it does seem like hopes of a major profit contribution from the company’s larger rival are dashed.
AMD Earnings Disappoint
The other piece of disappointing news from the analyst day was AMD’s long-term earnings target. Advanced Micro Devices management projected 2020 EPS of just 75 cents.
Most analysts, and certainly most AMD bulls, were expecting much higher numbers by the end of the decade. And the lower-than-expected EPS ties in with the disappointing gross margin projections for Q2. In both cases, the question is whether AMD can turn its sales momentum into consistent earnings growth. It’s a valid question because Advanced Micro Devices simply hasn’t been able to execute to that level in the past.
The 2020 targets do include double-digit revenue growth, and a steady increase in gross profit — even without an Intel deal. But they also leave AMD stock relatively richly valued, even 30% off YTD highs. An earnings multiple of roughly 14 times 2020 EPS isn’t cheap. Yes, NVDA stock trades at more than 30 times forward earnings, but Advanced Micro hasn’t proven itself the way Nvidia has. It has a much smaller GPU business than Nvidia, and AMD of course is second to Intel in CPUs as well.
And in the chip space, NVDA is an outlier. Micron Technology, Inc. (NASDAQ:MU) trades at a single-digit forward multiple. INTC is valued around 13x 2017 EPS. NXP Semiconductors NV (NASDAQ:NXPI) is being acquired by Qualcomm, Inc. (NASDAQ:QCOM) and still trades around 15 times 2018 estimates.
That out-year multiple requires years of consistent growth and execution from Advanced Micro Devices — both before 2020 and after. And for all the optimism toward new products like Ryzen and server chip Epyc (formerly referred to as Naples), AMD historically hasn’t executed at that level, and it hasn’t created profits.
The 75-cent target seems to highlight just how much of a change the gains over the past 18 months are pricing in.
The Bull Case for AMD Stock Isn’t Destroyed … But It’s Dented
It does seem at the least like the broader upturn in Advanced Micro might be paused for some time. Ryzen still has contributions to make, and the Epyc rollout could be a catalyst. But an Intel deal seems unlikely, and near-term earnings are going to have to be good enough to suggest that AMD is being conservative with its 2020 targets.
That’s a big ask.
Again, that doesn’t mean the bull case for AMD stock is necessarily destroyed by the events of the past few weeks. But there are some legitimate concerns, and expectations for Advanced Micro Devices stock probably should be tempered somewhat.
The 30% decline since February isn’t just a “breather” for the stock, or a correction necessary for AMD to resume its torrid run. Advanced Micro still has a lot of work left to do even to support its current share price — and it may not get nearly as much outside help as some investors hoped.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
