Advanced Micro Devices, Inc. (NASDAQ:AMD) has risen from the dead under CEO Lisa Su, but it remains a small fry within the semiconductor space. It’s supposed to compete directly against Nvidia Corporation (NASDAQ:NVDA) in graphics chips, but Nvidia is worth $85 billion in market capitalization, versus just $10.4 billion for AMD stock. It is supposed to be the most direct competitor to Intel Corporation (NASDAQ:INTC) in microprocessors, but Intel is worth nearly $170 billion.
AMD is outgunned no matter where it turns. It only has the financial capacity to place a few bets. And while the new chips it showed off at Computex in Taiwan were impressive, it left unanswered questions about follow-up.
The last time I wrote about AMD stock, I called it “trader” bait. That’s because just as Advanced Micro can go from $2 to $13 on good news, it can also go back down from $13 to $10 on bad news. Those kinds of swings are a trader’s dream, and an investor’s nightmare.
Now it’s time to talk about what kind of trader it is bait for.
Someone Needs to Buy Advanced Micro Devices
It is time for someone else to own AMD.
The much-hyped assault by Advanced Micro against Intel’s gaming chip castle was barely noticeable because AMD lacks the financial capacity to follow up.
Its Radeon graphics technology might work well in clouds, and its Ryzen line might look good in game machines, but AMD lacks the cash to pursue the breakthrough.
A buyer with imagination — and more important, a lot of cash — could.
If Softbank Group Corp (OTCMKTS:SFTBF) could see $31 billion in value from ARM Holdings, allowing its microprocessor designs to be tweaked before manufacture and controlled by OEMs in distribution, how much is AMD worth?
A Chinese buyer of AMD like Lenovo Group Ltd. (OTCMKTS:LNVGY) would gain intellectual property, and the engineers who created it, that could make a wholesale assault on Intel possible. A Korean buyer like Samsung Electronics (OTCMKTS:SSNLF) would get designs to fill its fabrication plants. An American buyer like Texas Instruments Incorporated (NASDAQ:TXN) would get the ability to enter new markets.
There are a lot of potential buyers out there.
Moore’s Second Law
What I have long called Moore’s Second Law — the fact that chip equipment costs rise exponentially with their complexity, even while complexity makes their processing cheaper — has forced the semiconductor industry to scale financially, beyond AMD’s capabilities.
Only four companies now have the wherewithal to build their own chip plants, and even the “fab-less” chip companies, which only design their processors, require enormous amounts of capital to compete. NXP Semiconductors NV (NASDAQ:NXPI) is getting bought by Qualcomm, Inc. (NASDAQ:QCOM) in large part because its radio chips need Qualcomm’s financial scale to compete. That should also be true for microprocessors.
AMD, while it can make headlines and sales, and deliver good designs to the market, lacks the financial muscle to make a profit. It made a little money in the June quarter of 2016, but it has only come close since, and that’s with the power of Ryzen and Radeon behind it.
Let the Auction for AMD Stock Begin
There are two ways this auction can start. Either AMD can let it be known that it is willing to talk about a buyout, or someone in private equity can take a sizable stake and start pounding the table for one.
Word of an auction would deliver a good pop in the AMD stock price, even before a deal was done. This is especially true if some of the bidders are Chinese, with all the implications of losing intellectual property to China that entails.
What investors should know is that this column is pure speculation. I have no evidence that AMD is for sale. Wait for news, or at least a reliable rumor from a big trading house, before you move.
Wait for it, then pounce.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, 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 INTC.
