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Is Advanced Micro Devices, Inc. (AMD) Stock REALLY Worth the Risk?

I wouldn't bet the farm on AMD stock

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has tumbled in the past month. At the beginning of August, the company’s largest shareholder, the Abu Dhabi-based Mubadala Investment Company, announced it had sold 40 million shares of AMD stock, in line with their strategy of maximizing long-term returns.

Is Advanced Micro Devices, Inc. (AMD) Stock REALLY Worth the Risk?
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But let’s not overlook the big picture. AMD and Nvidia Corporation (NASDAQ:NVDA) have exploded over the past 18 months, and both are up over 400%. The two produce graphics processing units that can be used for gaming, cryptocurrency mining, and parallel processing.

Advanced Micro Devices is the only chipmaker making both central processing units (CPUs) and graphics processing units (GPUs). In the CPU market, it competes against Intel Corporation (NASDAQ:INTC), the giant of the chipmaking world.

AMD stock has long played second fiddle to the two, but it appears to be giving Intel a real run for the money.

It’s not clear who will win though, and as InvestorPlace contributor Will Ashworth points out, opinions on this vary.

I think both bulls and bears can agree on one thing though: Advanced Micro Devices is a high-risk, high-reward stock.

Let’s examine the bull and bear cases.

Advanced Micro Devices: High Reward

AMD bulls have a point: if things go well, shareholders will walk home with enormous gains as seen by the enormous jump in the stock over the past 18 months.

But, over the long run, Advanced Micro Devices has greatly lagged Intel stock. Since 1978, INTC is up over 28,000%, compared to only 346.5% for AMD.

Does this sound familiar?

InvestorPlace contributor Tom Taulli compares this to the experience of Microsoft Corporation (NASDAQ:MSFTand Apple Inc. (NASDAQ:AAPLin the early 2000s. From December 1980 to May 2004, MSFT stock rose over 25,000%; AAPL only 290%. But look at their performance since then: MSFT stock is up 181%, compared to 8,155% for AAPL.

A shift in computing brought about this divergence between the AAPL and MSFT. Apple succeeded in mobile devices with its iPhone while the Windows Phone floundered.

Analysts at Jefferies think computing may be on the verge of yet another shift, this time from CPUs to GPUs, although they are more bullish on Nvidia than AMD.

Advanced Micro Devices’ smaller size also makes large gains possible. AMD’s enterprise value stands at $12 billion, compared to $94 billion for NVDA and $162 billion for Intel. A gain of $1 billion in sales should have a much bigger impact on AMD stock than NVDA or INTC.

Advanced Micro Devices posted 18% revenue growth year-over-year for the past two quarters now, and this could continue.

Some of the world’s biggest datacenter operators have agreed to use AMD’s EYPC server chips. Microsoft and Baidu Inc (ADR) (NASDAQ:BIDUsigned up in June. And that’s not all: Tencent Holdings Ltd (OTCMKTS:TCEHYand JD.Com Inc(ADR) (NASDAQ:JD) recently joined as well.

AMD Stock: High Risk

Advanced Micro Devices has above-average potential for returns, but it also above-average risks.

In my first article on AMD stock, I cited concerns over the company’s valuation.

AMD trades at 28 times book value, which looks a bit intimidating to value-minded investors. As a fabless chipmaker, the company doesn’t have to hold billions of dollars worth of foundries on its balance sheet like Intel, and this would be an apples to oranges comparison. Still, I couldn’t find any other semiconductor firms, even fabless ones, trading at a higher price-to-book multiple.

On some other measures of valuation, such as enterprise-value-to-gross-profit, AMD stock looks a bit more reasonable. Here, the company’s multiple of 10.77 compares with 19.03 for Nvidia and 4.22 for INTC.

I also noted some concerns with AMD’s balance sheet. The company neared bankruptcy last year, and survived by issuing new shares, diluting the stock. It remains cash flow negative.

Advanced Micro Devices also is a higher-beta stock than Nvidia or Intel, so in the event of another downturn it could face difficulties. A high beta also means a higher cost of capital.

Of course, if AMD does succeed in gaining a more predictable revenue stream, its cost of capital will fall and profits will rise.  

And some analysts, such as Toshiya Hari of Goldman Sachs and Blayne Curtis of Barclays, worry that AMD stock will be hit hard by a slowdown in cryptocurrency mining. Cryptocurrencies such as Ethereum have exploded over the past few months, and miners have taken to renting Boeing 747s to ship NVDA and AMD GPUs.

If the cryptocurrency boom came to a halt, demand for GPUs would decrease.

But AMD’s management is aware of this, and NVDA seems more bullish on cryptocurrencies.

Finally, as I’ve mentioned in my past articles, AMD operates in a very competitive industry. It also faces much bigger competitors with greater financial resources and bargaining power.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/09/advanced-micro-devices-inc-amd-stock-worth-risk/.

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