Advanced Micro Devices (NASDAQ:AMD) stock is like the Boston Red Sox. They’re so used to finishing second that winning still seems like a dream, even when it happens. The microprocessor company founded 50 years ago by a Fairchild team under Jerry Sanders — who led the company for over 30 years, installed its culture and is still around — became the technology leader this decade under Lisa Su.
As recently as September 2015, you could buy shares in AMD for under $2. They opened Wednesday at $26.40, the market cap having risen to nearly $30 billion from just $2 billion.
AMD stock has been reborn because its Ryzen chips, which are comparable with those of long-time rival Intel (NASDAQ:INTC), and are faster, with the manufacturing of Taiwan Semiconductor (NASDAQ:TSMC) being miles ahead.
The First Recession and AMD Stock
How long AMD can keep its lead has always been the question. It’s especially urgent now that the chip industry is finally going through one of its periodic slowdowns.
In AMD’s case, the slowdown is exacerbated by the trade war, because it depends on Chinese production and Chinese technology.
AMD managed the eke out earnings of $62 million non-GAAP, 6 cents per share, on revenue of $1.27 billion during the first quarter, which most analysts presume was the inventory recession’s bottom. Revenue was down 23% from a year earlier but gross margins rose to 41%, thanks to growing data center sales.
This is the first downturn in my memory where AMD stock has been able to stay profitable. It means the company was able to pay down $90 million in debt during the quarter, and it now has enough cash and marketable securities in the bank to pay off the $1.024 billion at a stroke, if it had to. AMD’s little ship remains a Minnow next to the Intel ocean liner, which has $12 billion in cash and short-term investments and is still worth $226 billion. But the little ship won’t run aground.
AMD’s Prospects
Past success is no guarantee of future results, and analysts are now more demanding of AMD. While shareholders who’ve stayed through its rise are positively giddy, the shares remain volatile. AMD stock still trades below its all-time high of last October, when it hit $33 per share, and its price to earnings ratio at its current price is an eye-popping 110, without a dividend to keep shareholders warm.
But the company continues to gain market share, and several OEMs will launch AMD-powered notebooks this quarter.
While Intel remains in its rear-view mirror, AMD still competes with Nvidia (NASDAQ:NVDA) in graphics, and revenues there were down last quarter. It’s a reminder that AMD’s success is in large part a product of Intel’s failure, and that it could still be kicked hard if the larger company ever got its act together.
But that’s not likely to happen soon. AMD announced a new “Rome” chip set in the third quarter with circuit lines 7 nm apart, a manufacturing process Intel is still working to perfect.
The Bottom Line
Long-term investors have long favored Intel’s dividend, now yielding around 2.5%, over the speculative gains in AMD stock. Only in the last year have the gains in AMD outpaced those of Nvidia.
AMD’s small size has been a big advantage to investors, because sales gains show up in the stock quickly. The question is always how long that can continue with AMD dependent on Taiwan Semiconductor technology.
While AMD is now fully valued, the end of the chip slowdown could easily spark more capital gains. If that’s your game, this is your chip stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
