Before Advanced Micro Devices (NASDAQ:AMD) released second-quarter earnings on July 30, I fretted.
A strong quarter was expected but already priced in, I wrote. I called AMD’s valuation difficult to justify.
Sure enough the numbers, earnings of $35 million, 3 cents per share, on revenue of $1.53 billion, sent the stock skidding 10%, even before the market re-opened on July 31. AMD share price of about $30.50 per share was due to open August 1.
AMD took its investors on an exciting ride over the last few years, from $2 per share in 2015 to its most recent highs of $34, on the strength of its beating Intel (NASDAQ:INTC) in microprocessors with its Ryzen designs.
But it’s time to take AMD seriously, as a potential long-term holding and not just a trade. How does it measure up?
AMD Stock Still Too Small
AMD has beaten Intel on the most public stages in the market, on desktop PCs, which have recently gotten their mojo back.
But in the cloud, AMD doesn’t offer the scale and pricing Intel does. Alphabet (NASDAQ:GOOGL) is rumored to be looking at AMD EPYC chips for its servers but, so far, that’s just a rumor. At the present time, AMD’s share of the server chip market hovers around 3%. Its desktop and laptop market share averages 15%.
While AMD has boosted its quality against Intel, thanks in part to Taiwan Semiconductor (NYSE:TSM), which can get circuit lines 7 nanometers (nm) apart while Intel is still struggling with 10 nm, it remains too small to deliver orders to the scale companies like Google need. Thus the Intel monopoly remains largely intact.
In its other niche, graphics processors, AMD must fight Nvidia (NASDAQ:NVDA) the way it once fought Intel on price. Nvidia’s market share in discrete processors hovers between 75%-80%. In the broader graphics market Intel still has 66% of the sales, although it was 75% a few years ago. Where AMD is gaining share in graphics, it’s usually at Intel’s expense, not Nvidia’s.
Where AMD has prospered is in the flashy front of the market, on devices bought by individuals, rather than in the meaty heart of the market, in clouds and servers. In gaming, AMD is the value choice, as it was once the value choice against Intel in PCs.
Advanced Micro Devices Is Up Against the Czars
Nvidia really takes AMD down in the cloud.
With a market cap of almost $103 billion, three times that of AMD, and twice its sales, Nvidia can compete here, especially with its $6.9 billion acquisition of Mellanox (NASDAQ:MLNX), which has yet to close. Nvidia is also way ahead in the “sexy” part of the cloud, in deep learning and artificial intelligence software.
Nvidia is much closer to big cloud orders than AMD. Here, chip makers must compete with one another and with the efforts of the Cloud Czars themselves. Nvidia graphics processors still hold a leadership position against Google’s Tensor chips.
Hardware is becoming software, and in this new world the Cloud Czars have everyone outgunned. AMD makes some nice cloud chips but, at its present size, they’ll never be more than niche offerings.
The Bottom Line on AMD Stock
In the 2020s it will take more than great design for a chipmaker to prosper. It will take scale, and a wide product line that includes software.
Despite its weaknesses Intel still has the scale to compete in this new world. Nvidia is acquiring it. It may be too late for AMD to get there before the Cloud Czars take over the chip world.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in NVDA.
