Anytime a person worth $18 billion ups his stake in any stock, it’s worth considering the reasons he or she is doing so. According to Renaissance Technologies’ latest 13F, run by billionaire Jim Simons, the hedge fund added 8.2 million shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) stock in the fourth quarter of 2016, a 254% increase from the quarter prior.
However, just because his fund is buying doesn’t mean you should too. Here are three things to consider before jumping on the AMD stock bandwagon.
AMD Stock — A Drop in the Bucket
Renaissance Technologies’ 11.5 million shares represent $162.2 million in market cap through March 15, a 24% increase over the last two-and-a-half months; a mighty fine return.
Ride the momentum would seem to be the play of the day when it comes to AMD stock, but remember one important thing: Simons’ $162 million holding is just 0.26% of the fund’s entire $63.2-billion portfolio.
At the end of December, Renaissance’s portfolio had nine holdings larger than its AMD position — and that’s just counting the stocks whose names begin with the letter A. In total, the fund holds 3,218 companies, the largest investment being a $623.3 million investment in Mastercard Inc (NYSE:MA).
The point I’m trying to make is that $162.2 million is a drop in the bucket for Jim Simons. Unless you can afford to lose your entire investment, it makes sense to diversify just as Rogers has done.
A good place to start would be the PowerShares Dynamic Tech Sec (ETF) (NASDAQ:PTF), a momentum play that has AMD stock as its number one holding at 5.1% of the $135-million-portfolio. It’s not cheap at 0.6% annually but gives you a lot more diversification (if that’s what lets you sleep at night) with 46 holdings.
You Gotta Make Money
Unless you’re loaded like Jim Simons it makes sense to invest in companies that make money — AMD doesn’t and might not for some time to come.
With Intel, you get a 3% dividend yield, $12.2 billion in free cash flow and a price-to-sales ratio of 2.9; AMD stock gives you no dividend, $13 million in free cash flow (that’s an M, not a B) and a price-to-sales ratio of 2.7, only marginally lower than Intel’s.
AMD has seen double-digit negative total returns in six out of the last 10 years for a reason — it can’t make money consistently enough for investors to trust it over the long haul.
As Ryan said, AMD stock is on a tear, up 419% over the past 52 weeks. It’s so tempting to buy into the momentum given all the great things it’s doing in gaming, but at the end of the day, earnings are what drive stocks higher.
Investors have $400 million (AMD operating losses in 2016) reasons to have second thoughts about AMD stock.
Speaking of gaming, AMD launched its Ryzen desktop processor March 3 to less-than-enthusiastic reviews. Gamers ripped the company for delivering a much-hyped product that failed to deliver against its Intel competition, knocking shares down for the first time in many months.
“If you look at Ryzen, what we’re doing with actually the high end, we’re putting an eight core processor out there, where today most games actually use only four cores,” said AMD CEO Lisa Su March 3 on CNBC. “We do really, really well for content creation and anybody who likes to run videos or edit videos and high performance games. We expect in a matter of weeks and months, we’ll get significant improvements” in gaming performance.
What else do you expect the company to say when it has got so much riding on this new processor.
Personally, I couldn’t tell you whether Ryzen will be the product that brings profitability back to AMD — its last operating profit was in 2013 — but what I do know is that if it doesn’t, AMD stock is sunk, only this time it will be permanent.
Bottom Line — AMD Stock
Investing is about probabilities.
What are the odds of AMD stock delivering another 400% return over the next 12 months? Well, considering it has never done so on a calendar year basis, I’d say slim to none.
Is Ryzen the second coming? AMD fans might see it as a win but the truth is the verdict is still very much up in the air.
What isn’t up for debate is the fact Intel will make money in 2017 and beyond. Maybe not as much as it once did, but not because of anything AMD’s done.
I wouldn’t own AMD stock, but if you’re a gambler you’re welcome to take a shot.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.