Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has taken a substantial hit over the last few weeks. Security flaw revelations had some speculating that AMD stock would fall to $0. That combined with reported production issues have reduced the stock price by about 25% in just the last four weeks.
However, despite the bad news, AMD’s move into graphics chips has turned years of losses into massive profit growth. A reduced stock price stemming from negative press combined with profit increases may be creating the perfect buying opportunity for Advanced Micro Devices stock.
Graphics Chips Revitalized AMD
I described AMD in a previous article as a “better ‘other’ chip stock.” The company spent most of its history as the arch rival of Intel Corporation (NASDAQ:INTC). Although Intel dominated this market, AMD carved out a niche by producing lower-cost processors.
However, as PCs evolved into niche products, the market changed, and AMD moved into graphics chips. Today, most analysts would describe AMD as the arch rival of Nvidia Corporation (NASDAQ:NVDA).
It has even teamed up with Intel to take on NVDA. However, with the advent of artificial intelligence (AI), virtual reality (VR), and cryptocurrencies, entering the market for graphics chips has proved to be a fortuitous move.
AMD Will Avoid a Takeover
Still, AMD stock suffered in March as news of flaws in its Ryzen chips sent the stock downward. It fell further as production issues with Ryzen chips and Radeon graphics processors came to light. Unlike Intel or Micron Technology, Inc. (NASDAQ:MU), AMD does not own fabs. Hence, it relies on partners for production, which puts the firm at a disadvantage.
Viceroy Research speculated that the flaws would send AMD stock to $0. History has shown that issues such as these do not destroy companies. Intel stock trades at a higher rise despite revelations in January of security flaws in its chips.
As for production issues, the price system tends to ensure that production capacity will appear when chip prices run high enough. Hence, investors should view production as a solvable problem.
Many, including some of my InvestorPlace colleagues, have speculated that a rival company will buy AMD. A merger might make sense financially. However, the Trump Administration has blocked the attempted purchase of Qualcomm, Inc. (NASDAQ:QCOM) by Broadcom Ltd (NASDAQ:AVGO).
It also thwarted attempts by T-Mobile Us Inc (NASDAQ:TMUS) to buy Sprint Corp (NYSE:S). With its second-place position in both graphics chips and PC processors, the federal government will likely block any attempts to take over AMD.
The case for AMD stock
So, assuming AMD stock is here to stay, investors must ask themselves if and where to buy. The equity offers compelling benefits. First, analysts believe profits will rise by more than sevenfold this year.
They also expect profits to increase by more than 50% in both 2019 and 2020. At a forward price-to-earnings (PE) ratio that stands under 23, this level of profit growth creates a compelling buy case.
Moreover, the second-place market position for its graphics processors further bolsters the buy case. Jack Welch, the longtime former CEO of General Electric Company (NYSE:GE) emphasized winning. He defined winning divisions and companies as ones that ranked first or second in their industry. As second overall in graphics chips, and first among many crypto miners, AMD stock maintains a valuable position in its market.
And if one decides to buy, the next question relates to the price level. Although I’m generally not a chartist, double bottoms usually indicate a buy sign. AMD stock just bounced off of a 52-week low of $9.05 per share.
If it again bounces from the low $9s per share, a buy point has likely been established. Or, if the stock can rise above the previous bottom set in the high $9s per share, interested investors should look there. Either way, the recent drop in the stock price is likely driven by short-term setbacks rather than any long-term problems that threaten its existence.
Final Thoughts on AMD stock
Given the popularity of their chips and the reduction in the stock price, a buying opportunity is likely forming for AMD stock. To be sure, the security flaws and production issues give the stock a degree of temporary uncertainty. However, stopping AMD’s second act in graphics processors will take more than temporary setbacks.
Moreover, with profit growth increasing and the stock price falling, the opportunity to buy Advanced Micro Devices stock at a reasonable price is presenting itself. Once AMD releases its next earnings report on May 7, much of the uncertainty caused by its setbacks should disappear. With a higher degree of certainty, the stock will likely be positioned to resume its move higher.
As of this writing, Will Healy is long MU stock.