Semiconductor stocks are enjoying a first-quarter resurgence. The PHLX SOX Semiconductor Sector index, a widely followed gauge of chipmaker equities, wrapped up the first quarter some 20% higher than it started. Meanwhile, index constituent Advanced Micro Devices (NASDAQ:AMD) gained 38%.
AMD stock — the gauge’s sixth-largest component — has been an important driver of semiconductor bullishness seen so far in 2019.
Recently, AMD stock got a lift from news that the company’s chips will power Google’s new online gaming platform, Stadia. That is a major win for AMD in the hyper-competitive space of gaming-related semiconductors, where the company competes with the likes of NVIDIA (NASDAQ:NVDA).
Powering Stadia’s graphics rendering in the cloud marks a big win for AMD in the gaming space, where it competes with Nvidia on graphics chips, reports CNBC. AMD’s stock spiked more than 5% after Morgan Stanley told clients that AMD had won the deal, according to Barron’s. The stock rallied even more after Google confirmed the deal on stage with AMD CEO Lisa Su looking on.
Not Just Fun And Games
While the Google Stadia win is significant for AMD, there is more to the story with this semiconductor stock. The company is also looking to challenge bitter, longtime rival Intel (NASDAQ:INTC) in the highly lucrative market data center server chips. AMD is definitely taking the fight to Intel on this front.
AMD recently called out Intel for performance bottlenecking in its Xeon server processors and is recommending that data center engineers switch to AMD’s options for better prices and performance, according to Digital Trends.
AMD says its Epyc System on Chip is price competitive with the comparable Intel offering. Describing what it calls the “Intel tax,” AMD asserts Intel’s server processor offerings are unnecessarily complex and that the rival has been steadily raising prices on those chips.
“When you try to optimize a server design using Intel Xeon Scalable processors, you find yourself in a maze of more than 42 different processor SKUs, 4 different metal codes, and 5 different series,” AMD said in a recent publication.
Going up against Intel on one front and NVIDIA on another means AMD is steeling for some stiff competition. Investors may see those challenges as causes for concern. Additionally, at current levels, AMD stock may be slightly overvalued. Shares of AMD trade at 39.2x forward earnings, more than twice the price-to-earnings ratio of the SOX Semiconductor index.
Bottom Line on AMD Stock
AMD stock is off almost 11% over the past week, more than double the loss of the Philly Semiconductor gauge over the same period. Given the bellwether status often assigned to the semiconductor group, the segment’s recent weakness could be a sign that broader markets are set to deteriorate over the near-term.
Couple that scenario with AMD stock trading around the average analyst price target and with stretched valuations, investors can probably wait for the stock to come in a bit more before getting involved.
Todd Shriber does not own any of the aforementioned securities.