Advanced Micro Devices (NASDAQ:AMD) surged at the beginning of June when the company announced a number of positive developments. After AMD stock topped $34, investors grew cautious on the stock, putting pressure on the shares as they closed yesterday at $29.26.
Just to recap that earlier positive news: Samsung said it would use AMD chips for its devices and Microsoft said its next-generation Xbox, dubbed Project Scarlett, will use AMD’s APUs. AMD also announced a number of 7-nanometer Ryzen CPUs and Navi GPUs under development.
Microsoft’s next-generation Xbox console will use AMD APUs. It will support 8K and its performance is four times more powerful than the current Xbox One X. Expect AMD receiving better average selling prices for the chips, which will translate to higher revenue for the semi-custom segment. AMD’s CPU powering the Xbox will be a Ryzen chip having 8 cores. AMD is ahead of competitors by offering a 7nm Zen microarchitecture. The Navi GPU will be on the next-gen Radeon RDNA architecture.
AMD Outselling Intel CPUs in Germany
Even as AMD wins the supply deal for Xbox and the Sony (NYSE:SNE) PS5 console, it continued to focus on its main business of computer CPU sales. Advanced Micro is outselling Intel (NASDAQ:INTC) CPUs at Germany’s largest retailer. In May 2019, AMD Ryzen CPUs and APUs had a 66% market share versus Intel’s 34%. Thanks to aggressive promotions and better pricing for combination deals, consumers are picking AMD over Intel.
Intel is not sitting back. Its beastly i9-9900KS, announced in late May, runs every core at 5.0 GHz. The desktop CPU will have 8 cores and 16 threads. TDP (thermal power) and the suggested price are not yet known. Intel will launch the chip in Q4 2019.
AMD stock fell when the U.S. Commerce Department added AMD Chinese affiliate Higon to the list of banned firms on June 24. This trade headwind now hurts AMD’s joint venture with the Chinese government set up in 2016. CEO Lisa Su successfully negotiated a deal to sell to China while earning licensing IP revenue. AMD also retained the patent rights to the x86 Zen architecture. The ban effectively cuts the important deal AMD had negotiated.
Navi sales may lag initially, due to the higher pricing for mid-range graphics cards. Still, Nvidia (NASDAQ:NVDA) set the price of mid-range cards and AMD followed suit. If Navi sales start to slow, chances are high that Nvidia will also face sluggish GPU sales, too.
AMD is still working through a glut in GPU inventory. Falling demand for such chips in the cryptocurrency space hurt sales in the past few quarters. AMD already had bloated GPU inventories in China. But the U.S.-China trade situation is potentially worsening AMD’s ability to draw down inventory.
Opportunity on the Horizon
While the July 7nm Navi product launch is a positive catalyst, AMD has more releases after that. In the third quarter, it will launch Rome, its 7nm second-generation data center CPU part. Initially, market share growth for EPYC started slow. AMD needed to spend the time developing the ecosystem. It had to build a relationship across that relationship, all the way through to the ODMs.
And with EPYC 2 also known as Rome, the solution will complement the architectural achievements it made and introduced to customers in the last year. Partnering with Taiwan Semiconductor (NYSE: TSM) for 7nm also reduces the risks associated with the entire manufacturing process.
Valuation and Takeaway on AMD Stock
A dozen of the 20 analysts covering AMD stock have an average price target of $32. This suggests the stock may have an upside of another 10%. Conversely, if investors assume revenue grows no more than 15% annually in a five-year revenue exit model, then the stock is fairly valued.
Investors need to decide if they are willing to pay ~30 times forward earnings, when Nvidia trades at 21.4 times and Intel is 10.5 times forward earnings. With AMD looking like it has better prospects than both Intel and Nvidia, chances are good the stock will maintain its uptrend.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.