This October is certainly living up to its frightening moniker. For investors in semiconductor superstar, Advanced Micro Devices, Inc. (NASDAQ:AMD), these days are feeling a bit like déjà vu. And not in a good way. Shares of AMD stock have basically been cut in half over the last two months- accelerating downward in the recent tech meltdown and throughout this earnings season.
That’s a pain long-term AMD stockholders know all too well.
Perhaps the scariest part is that AMD’s current woes seem awfully familiar to those woes that plagued the firm during the dot-com bust and resulting meltdown. Rivals are coming at them in a big way and sales of key products are slipping.
The question now is whether or not this is just a big scare for AMD, or if its recent plunges are the start of something a bit more sinister.
Big Gains & Bad News for AMD Stock
It’s hard to imagine, but AMD has been one of tech’s rising stars this year. Shares surged roughly 230% over the last eight months. The reason is that AMD finally got its mojo back and began to innovate like there was no tomorrow.
The semiconductor firm moved managed to strike CPU gold with its successful ZEN chips back in 2016. From there, Advanced Micro Devices RYZEN chipset has become immensely popular with consumers due to their high performance for low price points.
At the same time, AMD’s EPYC series has quickly taken market share in the vital server and cloud computing space. And with the continued need for advanced imagining in industries like healthcare, engineering and science, graphics processing unit (GPU) demand has surged.
A hefty dose of bitcoin and cryptocurrency mining hasn’t hurt either. This has only strengthened the bullish case for Advanced Micro Devices further. AMD stock heated up as investors looked at the turnaround and saw much improvement.
Then the bottom seemed to drop out for AMD. Back in mid-September, good news began to swirl around rival chipmaker Intel (NASDAQ:INTC). A research report from BlueFin Research Partners suggested that INTC’s production problems of its state-of-the-art 10-nanometer processors may not be as bad as feared.
At the same time, Intel managed to send improved guidance and boosted EPS numbers for its latest reported quarter. That alone managed to send AMD stock plunging. But for Advanced Micro Devices it got worse. Much worse.
On the surface, its latest earnings call was pretty good. AMD managed to report third-quarter revenue of $1.65 billion. This was up 4% when looking at year over year comparisons.
The problem is this was $50 million short of the analyst’s estimates. More important, it was significantly lower (a 6% drop) than the second quarter’s numbers and its revenue growth rate was down 53% as well.
The drop could be attributed to lower demand/pricing for those critical GPUs. So much so, AMD cut guidance numbers for the fourth quarter. With that investors were looking for the exits. The stock is down now more than 50%.
A Big Problem For AMD?
It’s easy to underway why investors have started to dump AMD shares in mass. If you remember, the reason for Advanced Micro Devices’ original fall from grace came down to rivals winning in a declining sales environment.
Thanks to better chipsets and licensing deals, Intel became the dominate semiconductors found in PCs. When the personal computing bust happened, AMD was sunk.
This sounds an awful lot like today. INTC is still dominating PC/server sales and its 10-nanometer processors will continue to gain/keep market share in the sector. At the same time, GPU demand is waning- partly because of the cryptocurrency bust.
Here again, AMD is a distant second fiddle to leader NVIDIA (NASDAQ:NVDA) and NVDA also provided lower guidance numbers back in August.
History has a strange way of repeating itself. The question is whether or not this actually happening at Advanced Micro Devices.
Like fellow InvestorPlace contributors Vince Martin and Luke Lango, I happen to think that the story at AMD was one-part rampant speculation and one-part actual real numbers. Advanced Micro Devices was once a $2-per-share stock. In it’s run up to over $30 per share, investors continued to place more and more on shares. Some of that was clearly wishful thinking and pure speculation.
The other part is based on some decent growth. Both sales of Ryzen PC CPUs and EPYC server CPUs have continued to grow. More important, Lango notes that AMD managed to score some major cloud computing contracts with heavy-weights Microsoft (NASDAQ:MSFT), Dropbox (NASDAQ:DBX), and Oracle (NASDAQ:ORCL).
At the same time, margins remain robust and the firm is still set to record more than $1.45 billion of revenue over the fourth quarter. That’s still an 8% year-over-year growth at the midpoint.
The reality is, the story at AMD remains pretty much intact. The potentially overvalued story before is not.
Watch AMD Stock
With that, AMD stock is very much a watchlist candidate. I expect the markets and tech stocks, in particular, to be pretty volatile over the next few weeks.
For investors that could give them a chance to snag shares at a more reasonable, if not bargain price. At a forward P/E of 36x, Advance Micro seems pretty fairly valued when looking at the tech sector.
All in all, the growth story is there and now, investors can actually play it versus just pinning it only on hopes.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
