On its 50th anniversary, semiconductor and technology firm Advanced Micro Devices (NASDAQ:AMD) has unfinished business. Last year, AMD stock absolutely destroyed the markets with a searing 77% return. But for a brief moment in September, shareholders were enjoying a more than three-fold increase. AMD is looking to get back to those record-breaking highs.
Management did themselves a lot of good in reaching for that lofty goal with their most recent earnings performance. Prior to their first quarter of fiscal 2019 disclosure, analysts anticipated earnings-per-share to hit 5 cents. Advanced Micro Devices delivered EPS of a penny higher, feeding enthusiasm toward AMD stock.
In addition, the tech firm rang up $1.27 billion in revenue. This haul also beat analysts’ expectations, with the consensus calling for $1.26 billion.
During extended trading following the earnings report, AMD stock jumped up nearly 5%. That’s the good news. But the day after in the regular session, shares closed down 3%. Naturally, investors would like to know: can Advanced Micro Devices retake the psychologically significant $30 level? Let’s dive in, beginning with the bull case:
Yes, AMD Stock Can Go to $30 and Beyond!
If you’re optimistic about AMD stock, you actually have two earnings reports that support your thesis: first, you of course have the target company’s profitability and growth beats. But you’re also enjoying — in a schadenfreude type of way — Intel’s (NASDAQ:INTC) disastrous Q1.
To be fair, the print wasn’t bad. In fact, like its smaller rival, Intel exceeded expectations. The behemoth chip-maker delivered EPS of 89 cents, 2 cents above consensus. Also, INTC made the cash register sing with $16.06 billion in sales, up slightly from the $16.02 billion target.
So, what made INTC crumble? Intel’s management team guided down full-year 2019 sales expectations to $69 billion from $71.05 billion. Conspicuously, the markdown brings the new estimate below 2018’s sales haul of $70.8 billion.
But it’s not just the poor guidance. Intel revealed that the data-center industry has a supply glut of memory chips. That’s bad news for the company, which is one of the top competitors in providing those chips. Additionally, basic economic principles dictate that excess supply decreases demand. That’s also not great for INTC.
Next, you factor in the point that Intel is having trouble bringing its next-generation chips to the table. On the other hand, Advanced Micro Devices has no such problem.
During AMD’s doldrum years, their leadership team always dreamed of an opportunity to take it to Intel. That time is now. Therefore, the case for $30 AMD stock seems a foregone conclusion.
Not So Fast, AMD
But in a strange twist, Intel’s earnings are also cause for concern for Advanced Micro Devices. While Intel is on the ropes regarding their Q1 numbers, AMD really isn’t in a great position to deliver the much-awaited knockout blow.
The key here is why Wall Street abandoned Intel. Again, it has to do with the outlook toward data centers. That was, and still is a big market for Intel. Guess what? It’s the same for everybody else in the chip-making segment.
AMD stock doesn’t exist in a vacuum. Although it has a product and pricing advantage over Intel, the timing is unfortunately off. Due to the data-center supply glut, AMD’s margins will take a beating, just like its rivals. However, the difference is that Advanced Micro doesn’t have the resources to weather multiple, extended storms.
And let’s be real — their Q1 wasn’t all that great. For instance, the Computing and Graphics segment slipped 26% year-over-year to $831 million. Sure, analysts largely expected the downturn. But this drives home the point that Advanced Micro cannot afford a slowdown in a key revenue driver.
Let’s also note that while AMD is eyeballing Intel, other companies are eyeballing AMD. For instance, Amazon (NASDAQ:AMZN) made waves late last year when it announced its foray into semiconductors. If Amazon feeds their data centers with homegrown chips, that’s an account neither Intel nor AMD will benefit from.
Bottom Line on Advanced Micro Devices
I think we must give AMD stock a lot of credit. Previously, I’ve doubted the underlying company’s ability to compete with the big boys. Needless to say, I’ve been proven wrong.
However, it’s not a smart idea to go all-in right now. A high probability exists that AMD will retake the $30 level. I just don’t think that move will occur soon.
This isn’t about beating Intel anymore. Instead, Advanced Micro Devices must prove that it can thrive under a severe industry downturn. That’s a much riskier narrative in which I’m not interested in participating.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
