Why Advanced Micro Devices, Inc. (AMD) Stock Will Stay in Neutral

Advanced Micro Devices, Inc. (NASDAQ:AMD) hasn’t had a bad 2017 by any measure. At 11% gains year-to-date, AMD stock is about a percentage point ahead of the S&P 500. That gain does trail the Nasdaq Composite, up about 17%, but considering Advanced Micro nearly quadrupled in 2016, the relatively muted gains this year are at least understandable.

Source: AMD

AMD shares have had a somewhat strange year, though, best exemplified by their trading over the past four months.

In early may, Advanced Micro Devices plunged 24% following its first-quarter earnings report. Disappointing earnings and concerning gross margin led investors to stampede out.

But before its next quarter, AMD stock already had recaptured those losses. It then posted a nice Q2 beat with a surprise profit. Shares gained as much as 11% the following day, and seemed set to reach $16 for the first time since before the financial crisis.

Since then, it has been straight down for AMD, which has lost nearly 20% off those post-earnings highs.

AMD stock chart

The trading has been choppy — and almost contradictory. What looked like bad earnings news was bought. Good news was sold. But that makes a bit more sense than it might appear at first blush.

After all, investors are waiting for big news. And until that news comes, I expect AMD stock to stay relatively flat — even if it takes some winding roads to get there.

Can Advanced Micro Devices Compete This Time?

The big gains from the February 2016 lows had one major driver: Advanced Micro Devices, after years of struggling, had improved its operations and products enough to become a legitimate competitor to Intel Corporation (NASDAQ:INTC) in CPUs.

With PC sales stabilizing, that improvement was enough to boost AMD stock from the $2-plus levels seen early last year. But a higher share price means higher expectations. And the road now is a bit tougher.

AMD’s Ryzen line does appear to be a legitimate competitor to Intel chips. But I still believe that Ryzen alone isn’t enough to get shares out of the low- to mid-teens. AMD’s Epyc chips are aiming at Intel’s near-monopoly share in the datacenter. Epyc and Vega GPUs both bring AMD into competition with Nvidia Corporation (NASDAQ:NVDA).

Those are both tougher areas for AMD, which at least has a history and a niche in CPUs as the lower-cost, if traditionally lower-performance, provider. Competing on price in gaming and datacenter probably won’t be enough. And investors are no doubt waiting to see if Advanced Micro Devices can do enough from a performance standpoint in those areas to take share.

It’s not an impossible road, but it will be a difficult one — which might explain why investors aren’t quite ready to make an all-out bet on success.

AMD Needs Profits

The most important piece of news so far this year was bearish for Advanced Micro, in my opinion.

At the company’s Analyst Day in May, AMD cited a roughly 75-cent target for 2020 EPS. That number appeared to disappoint investors — AMD stock sold off 11% on the news — and with good reason.

For all the current optimism toward semiconductor stocks — witness NVDA’s valuation, or Intel’s takeout of Mobileye NV (NYSE:MBLY) — the space is usually very competitive, and very cyclical. The fact that PC sales are going to be flat at best going forward doesn’t help Advanced Micro Devices, either.

As a company that has been unprofitable basically for a decade, AMD still needs a relatively large ramp in profitability. That multi-year guidance suggests management isn’t nearly as optimistic as many bulls. And it calls into question whether the stock can hold $15 any time soon — a price that implies a 20x multiple to targeted 2020 EPS.

It’s true that NVDA trades at more than 50x, but AMD simply isn’t Nvidia. And even a profitable, growing company like NXP Semiconductors NV (NASDAQ:NXPI) is being acquired by Qualcomm, Inc. (NASDAQ:QCOM) for under 20 times this year’s earnings.

The amount of earnings growth required here is why the stock sold off on gross margin guidance after Q1. And it’s at least part of why resistance has held fright at $15. AMD needs to take share in all of its products — not just one or two.

Again, that’s easier said than done.

It Will Take Time to Figure Out AMD Stock

The choppiness in Advanced Micro Devices makes some sense. The company has a big task in front of it — and it’s still a bit too early to tell how much success it will have.

There’s real opportunity here — but real risk, too. And until that changes, I’d expect AMD stock to keep bouncing around in its current range.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/08/why-advanced-micro-devices-inc-amd-stock-will-stay-in-neutral/.

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