Chip Flaws Aren’t Biggest Problem for Advanced Micro Devices, Inc. Stock

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AMD stock - Chip Flaws Aren’t Biggest Problem for Advanced Micro Devices, Inc. Stock

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For the most part, investors have shrugged off reports of chip flaws at Advanced Micro Devices, Inc. (NASDAQ:AMD). AMD stock actually rose 1% on Tuesday, when the flaws were announced. The AMD stock price yesterday (Wednesday) dropped 2.4% in a weaker tech market.

That seems about right — for now. AMD responded to the report by saying that it only recently had been made aware of the claims. The firm behind the research may be associated with a short seller who has targeted AMD stock. Both AMD and Intel Corporation (NASDAQ:INTC) faced more credible reports of the Spectre and Meltdown flaws, and those reports did little to stem the rally in Intel stock, anyway.

Still, the firms make an intriguing case that AMD’s new products have significant flaws. But regardless of the accuracy of the research, AMD stock still looks boxed in. I argued a month ago that AMD shares were likely to stay stuck for a while.

That still seems to be the case.

Do AMD Chips Have Significant Flaws?

The tech report from Israeli firm CTS, available at amdflaws.com, cited 13 “critical security vulnerabilities” in AMD chips. Notably, the vulnerabilities are seen in two newer, key AMD lines: Ryzen and EPYC.

Other researchers appear to have confirmed at least some part of the CTS findings. And while the vulnerabilities are referred to as “second stage” — meaning hackers would have to gain administrative privileges before exploiting the flaws — they could, in theory, present significant risks for cloud providers like Microsoft Corporation (NASDAQ:MSFT) and major enterprise customers.

As far as the financial impact goes, Viceroy argued in its report that AMD stock could head to zero. The argument from Viceroy is that Ryzen and EPYC are so important to AMD — which needed to catch up to Intel and Nvidia Corporation (NASDAQ:NVDA), among others — that the products were rushed to market. In that rush, AMD failed to execute basic security measures.

And, as Viceroy points out, the most concerning flaw appears to be a hardware vulnerability, which CTS named Chimera. Chimera provides a “backdoor” into Ryzen chips — and it’s Ryzen that has driven much of the optimism toward AMD stock as it has risen from $2 over the past 25 months. Per Viceroy, AMD outsourced its chipset to Taiwan’s ASMedia — and it was ASMedia that created the backdoor, a major security concern.

Would Flaws Hit AMD Stock?

So, to Viceroy, the chip flaws are a major problem for AMD stock. As the company points out, forecasted revenue growth, excluding Ryzen and EPYC, is barely 2%. With the AMD stock price today implying a 22 forward multiple, that kind of growth would imply significant downside.

That said, Viceroy’s argument that AMD could head to zero seems a bit overwrought. Viceroy cites potential loss of revenue from downtime in the affected products, along with recall costs. The firm says legal costs could lead AMD to “prudently file for Chapter 11” bankruptcy.

But AMD finished 2017 with over $1 billion in cash, and only modestly more than that in debt. A bankruptcy looks like a stretch. Certainly, if CTS is right, AMD’s revenue and profit growth would slow. In the near term, it could even potentially reverse. Arguing that chip flaws in what still are relatively smaller lines could bankrupt AMD — and wipe out the equity — is a bridge too far, however.

AMD Stock Should Be Avoided — at Least for Now

From here, the risk to AMD from the reported flaws appears relatively minor. This still is an $11 billion company; even a relatively significant impact would still seem manageable relative to AMD’s stock price.

Still, it’s tough to see AMD as all that compelling at the moment. Both Bret Kenwell and Luke Lango have discussed the possibility of AMD being a takeover target. I’m relatively skeptical on that front, though I suppose Broadcom Ltd (NASDAQ:AVGO) could be considered a suitor now that its acquisition of Qualcomm, Inc. (NASDAQ:QCOM) has fallen through.

And as a standalone, I’m not sold on AMD. Even with Ryzen and EPYC growing, AMD still has a major second-place problem in its key markets. The company itself is targeting just 75 cents in earnings per share by the end of the decade, implying a 15 P/E multiple.

Below $10, AMD stock gets more interesting. At the moment, however, I still don’t see a catalyst for major upside. That’s been the problem for a long time, and it’s a problem even if this week’s reports are wrong.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/chip-flaws-arent-biggest-problem-advanced-micro-devices-stock/.

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