Does AMD Stock Have a China Problem?

Advanced Micro Devices (NASDAQ:AMD) has been transformed, and its transformation has revitalized Advanced Micro Devices stock.  But this is not a case study of how a once-dominant company has came back to life.  Keep in mind that throughout its 50-year history, AMD has been a distant number two to Intel (NASDAQ:INTC).

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When Lisa Su became CEO of AMD in late 2014, there was little hope for the company. AMD stock price was below $3, and there was concern that it would soon file for bankruptcy.

But of course, she wasted little time in making bold decisions. The result is that Advanced Micro Devices stock has become a darling of Wall Street. For the year so far, the shares are up 68%.

A recent article in The Wall Street Journal provided fascinating details on Su’s changes. And it was mostly about reaching out to China. First of all, Su sold off majority stakes in two chip factories, which not only brought in a much-needed influx of capital but also made the company more streamlined.

But Su’s most important move was the forging of a joint venture with China’s Sugon Information Industry Co., which wanted to build an ultra-fast exascale computer that can make 1 billion calculations per second!

This deal was actually a testament to AMD’s core technologies.  Moreover, as part of the transaction, Sugon invested in AMD and made a lucrative licensing arrangement with it.

Yet there was a nagging issue: Might the company have skirted regulations to prevent the transfer of key technologies? Perhaps so. But for now, it’s probably too late for the federal government to do anything about it. Besides, the regulations regarding joint ventures were vague.

AMD Stock and China’s Power

Su was able to leverage the capital to ramp AMD’s R&D, resulting in a series of standout products.  AMD’s Radeon graphics technology has been getting quite a bit of traction and eating into the market share of Nvidia (NASDAQ:NVDA). AMD’s recent deal with Samsung is a clear sign of the power of its technology. Note that AMD also recently signed a contract to supply chips for Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) upcoming cloud-based gaming console, Stadia.

Then there is the server market, which is massive. AMD’s EPYC chips for servers are making serious inroads against INTC.  And the company’s upcoming seven-nanometer systems are likely to enable it to keep up the momentum.

Meanwhile, Cray (NASDAQ:CRAY), which is in the process of being acquired by Hewlett Packard (NYSE:HPE), plans to use AMD’s CPUs and GPUs for its Frontier supercomputer, expected to be the world’s fastest computer.

The Bottom Line on AMD Stock

The outcome of the G-20 meeting is certainly positive for AMD stock. The  president’s decision to allow U.S. companies to sell products to Huawei will alleviate pressures on AMD. And the truce will prevent further disruption of the global supply chain.

Yet there are certainly risks facing AMD stock. The news of its joint venture with Sugon will probably result in much more scrutiny from the federal government.  That could make it tougher for AMD to pursue opportunities in China, limiting its growth in the years to come.

But then again, AMD is a much different company nowadays and its sales are likely to still gain traction, as larger customers that want alternatives to INTC gravitate towards AMD. So all in all, even with the risks, the outlook of AMD stock still looks strong.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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