Advanced Micro Devices, Inc. (NASDAQ:AMD) has long been an incredibly frustrating company to invest in, though most of Wall Street understandably forgot that for the past year. After all, AMD stock ripped off 700% gains between February 2016 and March 2017.
Those are the gains that dreams are made of, even if you didn’t perfectly time your entry.
But for much of its publicly traded life, AMD has been about unrealized potential and disappointed shareholders.
The Problem With Advanced Micro
For decades now, AMD has struggled to keep pace with archrival Intel Corporation (NASDAQ:INTC). Over the past decade, shares of AMD are down nearly 27%. That even includes the massive recent rally in AMD shares.
The latest hype surrounding AMD is centered around the idea that it as Nvidia Corporation (NASDAQ:NVDA). Namely, chips that support gaming graphics — NVDA focuses heavily on PCs, while AMD powers Microsoft Corporation’s (NASDAQ:MSFT) Xbox and Sony Corp’s (ADR) (NYSE:SNE) PlayStation — artificial intelligence (AI), self-driving cars, and data center. Nvidia is far away the winner in the category, with its products eclipsing those of both Intel and AMD.
The past five years not only demonstrate Nvidia’s rise to fame, but also its outstanding performance — more than 1,100% in just a half-decade!
However, for about a year, AMD was putting together far more robust gains, and thus drew more of the attention in the space. That is, until the past couple of months.
AMD stock is off nearly 30% since the end of February as investors are beginning to digest a number of things. How much of Advanced Micro’s run was built on hype? How good are the fundamentals really? The company’s first-quarter sales jumped 18% to $984 million, and Ryzen CPU and graphics processor sales were strong.
But despite a fundamental picture that has been improving for several quarters, AMD still posted a loss of $73 million, or 8 cents per share.
That picture was further cemented in guidance, which was strong on the top line but weak on the bottom. Full-year sales are expected to grow by the low double digits, but profit guidance … well, they didn’t bother, which isn’t surprising considering its last annual profit was back in 2011.
Worse, AMD has generated positive free cash flow just once in the past decade — back in 2009, and that was only a penny per share worth.
Why All the Bullishness, Then?
The current excitement surrounding Advanced Micro Devices centers on the exciting markets it serves.
In 2016, AMD reported $4.3 billion in sales. Just over half of that came from the processors, customized chip systems and related technology that form the guts of gaming consoles. Roughly the other half of sales come from selling processors and chipsets that run desktops and notebooks.
This is Intel’s turf, and AMD has had a tough time staying competitive in recent years.
Advanced Micro’s recent investor day highlighted the powerful trends in markets served. Graphic chips are used in gaming, machine intelligence, and virtual/augmented reality. Computing chips can serve traditional PCs, but also infrastructure and cloud computing. Data centers are all the rage, and deservedly so because cloud computing continues to take off.
In 2017, AMD plans to “launch strong new products, expand margin, [pursue] revenue growth, and drive profitability.” Its customer list is impressive — in addition to the gaming systems mentioned above, its chips can be found in HP Inc (NYSE:HPQ) computers, Apple Inc’s (NASDAQ:AAPL) MacBook Pro, as well as Dell and Lenovo computers.
Boeing Co (NYSE:BA), Alphabet Inc (NASDAQ:GOOGL) and Samsung Electronics (OTCMKTS:SSNLF) are all clients. Total markets served total nearly $60 billion.
It’s just confusing to me, as well as most investors, why AMD can’t figure out how to make money.
Bottom Line on AMD Stock
Lack of profitability is acceptable in a high-growth startup that’s figuring out how to monetize the space. But it’s difficult to stomach from a company that’s nearly half a century old. It’s also difficult to stomach from a company that plays in the same sandbox as Intel, which might be slow and stodgy, but also generates billions in excess free cash flow every year despite pouring billions into research and development.
Nvidia is growing gangbusters and turning a profit. Its first-quarter sales jumped 48% to nearly $2 billion, more than a quarter of which ($507 million) managed to find its way to the bottom line.
Analysts project full-year sales growth of 13% to total revenues of $4.8 billion at AMD, but a loss of 4 cents this year. They’re more optimistic about next year, projecting profits of 30 cents, but let’s not put the cart before the horse.
Valuing AMD on net income and cash flow metrics is not reliable given the negligible profits over the years. All investors can do is hope profits will someday come flooding in.
Given what Intel and Nvidia are generating, it shouldn’t be as difficult as it has been for Advanced Micro’s management.
AMD stock deserves a wait-and-see approach at this point. I have opted for INTC because I require cash flow production for nearly any investment I make. At this point I am kicking myself for missing Nvidia when it fell briefly below $100. The forward P/E is back above 30x, but not all that unreasonable given the sales and profit growth.
As of this writing, Ryan Fuhrmann was long INTC.
