Advanced Micro Devices (NYSE:AMD) stock price is up over 60% year-to-date. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) has only achieved half of that gain. Investors in chip stocks are now looking at AMD stock as a potential value play.
Analysts now report that AMD is picking up market share in focused segments of the chip market. AMD is definitely in the gaming console market as both Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are going to use AMD chips in their new consoles.
AMD is also slowly picking up market share in the server CPU market as well as the GPU market. Its 7-nanometer processor chip allows more transistors to process data at faster speeds than its competitors’ chips. Analysts estimate are warming up to AMD stock citing its chips which give it a one and half year lead.
AMD’s Financials are Turning Around
AMD recently reported sales down 13% year-over-year. But on a sequential basis, AMD’s revenue was up 20%. It also gave an outlook that sales in the next quarter would 18% higher and up 9% year-over-year. Earnings were up 32% sequentially in Q2 as well.
Free cash flow was negative in the second quarter but will likely be positive in the third quarter.
AMD stock has been propelled by this financial turnaround. Analysts are now expecting earnings per share of $1.04 by 2020. This gives Advanced Micro Devices stock a forward price-to-earnings ratio of 28 times.
What to Do With AMD Stock?
AMD stock’s lack of dividend puts it a disadvantage to its competitors, as noted above. In addition, INTC, QCOM, and NVDA all have lower price-to-earnings ratios. In fact, Intel’s forward P/E is only 11x, less than half that of AMD stock.
Moreover, as I pointed out at the end of August, AMD’s peers all have stock repurchase programs. AMD does not buyback its stock.
In short, AMD does not have the financial health and capital returns that INTC, QCOM, and NVDA offer investors. AMD stock also does not have as compelling value metrics as its peers.
But it is trying. Investors should watch AMD stock price carefully. Once its free cash flow turns positive, it is possible AMD may begin paying a dividend and/or buying back its shares.
At that point, investors might want to warm up to Advanced Micro Devices stock.
As of this writing, Mark Hake, CFA, does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on August 30. Subscribers during September receive a 20% discount, plus a two-week free trial.