In another sign of the company’s rising clout, Advanced Micro Devices (NASDAQ:AMD) won a major contract to provide the processing power for what will likely become the world’s fastest supercomputer. Despite this news AMD stock fell on Tuesday following the announcement.
I believe traders should take this as a sign that Advanced Micro Devices stock remains mired in short-term concerns. The shares have the profit growth they need to benefit stockholders long term. However, until the company can get past the chip glut and overall market uncertainty, investors will likely not bid the AMD stock price higher.
AMD Will Power the World’s Fastest Computer
The company has won a $600 million contract to produce what will become the fastest supercomputer in the world. In conjunction with Cray (NASDAQ:CRAY), it will develop the Frontier supercomputer for the U.S. Department of Energy (DOE) for Tennessee’s Oak Ridge National Laboratory.
It will combine artificial intelligence (AI) with both modeling and data analytics and is expected to achieve processing speeds about 50 times faster than today’s supercomputers. AMD will provide the graphics processing units (GPUs) and central processing units (CPUs) for the project. The previous supercomputer, Titan, used AMD CPUs but utilized GPUs from Nvidia (NASDAQ:NVDA)
The deal confirms that AMD has become a force in the industry. Now, it shows it can win contracts that have often gone to Nvidia or Intel (NASDAQ:INTC) in the past.
Don’t Expect DOE Contract to Boost AMD Stock … yet
Still, the Oak Ridge contract seems to have made little difference to Advanced Micro Devices stock. AMD fell by almost 2.8% despite this news, standing in contrast to the 14%-plus rally in CRAY stock. It also confirms the complex nature of AMD stock’s short-term trading patterns. When I covered the stock in March, it had rallied by 12% in a single day on no news.
To be sure, the deal bolsters the long-term case for owning AMD stock. However, short term, the shares remain mired in the chip glut that took them down late last year. While they recovered much of that lost value, a return to previous highs has stalled. Since falling just short of the $30 per share level in early April, the stock stalled. It has now started to fall back, going below $27 per share despite winning the supercomputer contract.
As of this writing, the indexes have sold off mostly because of uncertainty involving U.S.-China trade negotiations. I do not see AMD stock escaping this short-term trend. Hence, I would watch the S&P 500 index trends before opening a position. Still, once the dust settles, I see a buy case for the stock.
For fiscal 2020, analysts predict earnings of 99 cents per share. Wall Street predicts the glut in chips will end soon, leading to a turnaround in profit growth. They forecast an increase in earnings of 39.1% this year and 54.7% next. This would take its forward price-to-earnings (PE) ratio to about 27x at current levels. That multiple may exceed the current S&P 500 average of 21.78x. However, AMD stock far exceeds the S&P’s average earnings growth rate of 20.49%.
Bottom Line on AMD Stock
AMD stock has become a long-term winner mired in short-term concerns. Advanced Micro Devices chips will power what will become the fastest computer in the world. This should serve as the ultimate confirmation that the days of playing “little brother” to Intel are long behind the company.
Despite this coup, AMD stock fell along with a large-scale market selloff. Moreover, investors may still feel the sting of a quarterly report showing that revenue and profits remain well below year-ago levels.
However, markets tend to look toward the future. The next few quarters point to massive profit growth and now, a lucrative contract proving the perception that Advanced Micro has become a top semi company. Once the market again begins to rally, AMD stock should again live up to its full potential.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.