Advanced Micro Devices, Inc. (NASDAQ:AMD) delivered a great run to investors from early 2016 until this spring, rising from $2 per share up to nearly $15 in April. It was around then that I called AMD stock overvalued — more risk than reward.
Since that call, the shares are down 30%, highlighted by a plunge of more than $2 per share when earnings came out May 2.
Those numbers — a GAAP loss of $73 million (8 cents per share) on revenue of $984 million — now have analysts at Goldman Sachs yelling “sell, sell, sell,” saying shares are priced to perfection even after their recent fall.
What investors should do in the wake of such a quick boom-and-bust cycle is go back to fundamentals, ask what AMD stock can really do for them, then set realistic expectations for it and decide for themselves if they want to buy.
What AMD Can Do
At its current market cap of $9.54 billion, Advanced Micro Devices’ shares are selling at about 2.5 times the company’s revenue — earnings multiples are useless here since there are no earnings. Intel Corporation (NASDAQ:INTC), which is profitable and even delivers dividends yielding almost 3%, has about $60 billion in annual revenue on a $170 billion market cap, meaning its P/S ratio is about 3.
Because AMD is “fabless,” designing chips rather than producing them, it can get good margins on designs the market likes, and avoid production costs when its designs fall from favor.
The growth of AMD stock is tied to its Radeon graphics chips, which compete with the Nvidia Corporation (NASDAQ:NVDA) GeForce line, and Ryzen microprocessors, which compete with Intel. Their calling card is competitive performance at a lower price, with Radeon production ramping-up in graphics cards selling for under $100 and with a full line of “Vega” gaming cards to come.
Advanced Micro gets a pop on both sales and margins when it releases a new chip line-up, in other words, but that pop is often short-lived, and it may be with Ryzen. AMD hype peaked when early reviews on the new Ryzen chip were positive. But the company then warned in its earnings release that Ryzen margins are not going to expand once that processor is in full production, and Ryzen prices are already deteriorating.
Ryzen has recently gained share against Intel, but that gain depends on its maintaining lower prices and, thus, lower margins.
I Can Haz Profit?
Making Advanced Micro Devices profitable requires sales gains without bigger development budgets. The case for AMD stock is based on the idea that it has just completed a major development cycle, that it can tweak its designs to maintain share, and that it can sell that production at fair margins.
All that is possible, especially over the next two quarters. But at some point, AMD must go back into development mode, where it is outgunned by its rivals.
AMD says the Ryzen architecture can remain competitive for four years, so the company should already be working on whatever follows Ryzen in 2021. Watch the numbers on development costs.
Bottom Line on AMD Stock
The bottom line here is that AMD is, and will remain, a trader’s stock.
Its results are subject to volatile swings. The company is never going to be the leader in its category. Profits will always be thin, sometimes non-existent. Rumors, about new products, or about a sale of the company, will always buffet the stock.
If you’re a trader, you like this. If you are into quick trades, you get a lot more action on AMD stock than any other chip play. Smaller-company shares are more volatile. They are more fun.
As an investor, however, I avoid the dog track. I root for AMD, but I don’t own it. If you’re a long-term investor, neither should you.
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 was long INTC.
