Advanced Micro Devices (NASDAQ:AMD) stock may have been one of the best stocks of the last four years. During this period, AMD stock has surged by 1,550% after the company recovered from the brink of bankruptcy.
However, it is also worth noting that AMD stock price has been trading at almost the same level for the last year. Clearly, Advanced Micro Devices stock has paused after its massive rally. I think that AMD stock price may tread water or drop in coming quarters.
Before discussing company specific factors, it is worth mentioning that the semiconductor industry is sensitive to fluctuations of the economy. With global economic growth likely to remain sluggish, AMD stock will face macroeconomic headwinds.
On the other hand, trade talks will resume between the United States and China. Any positive development on that front can trigger a short-term rally by Advanced Micro Devices stock.
AMD’s Competition Is Likely to Intensify
There is no doubt that Advanced Micro Devices has an edge in the near-term over Intel Corporation (NASADAQ:INTC). Intel has been complacent, and that has allowed AMD to gain market share with its new products.
However, Intel remains the market leader, and it is launching more competitive products. Additionally, Intel has promised to fight back aggressively against AMD.
In August, Intel launched the first of its new core processors. According to the company’s press release:
The processors bring high-performance artificial intelligence (AI) to the PC at scale, feature new Intel® Iris® Plus graphics for stunning entertainment and enable the best connectivity1 with Intel® Wi-Fi 6 (Gig+) and Thunderbolt™ 3.
There is also speculation that Intel will be launching its “Comet Lake Desktop” chips in 2020. However, Intel is unlikely to launch 7 nm chips before 2021, and that gives AMD an advantage in the medium-term.
While the trade war probably won’t continue, I expect Chinese companies to reduce their reliance on U.S. corporations in the coming years.
Zhaoxin, a Chinese microprocessor designer, has launched an x86 CPU. I am not suggesting that Intel and Advanced Micro Devices will lose market share in China in the near-term. However, I do expect Chinese competitors to negatively impact their growth in the nation over the next three to five years.
Margin Compression Is a Concern
In the coming years, margin compression may also become a concern for the owners of Advanced Micro Devices stock. It is clear that Intel will aggressively launch products as it tries to save its market share.
However, another area where Intel can impact Advanced Micro Devices stock is pricing. Intel is better positioned from a balance sheet perspective to aggressively cut prices than AMD. The price war is already on, and I believe it will impact AMD’s EBITDA margin.
It is also worth mentioning that Nvidia (NASDAQ:NVDA) and AMD have also been engaged in a price war. I am more bullish on Nvidia stock than on AMD stock because NVDA is making inroads in autonomous driving and AI.
The key point, however, is that AMD’s operating income and EBITDA are likely to become depressed as the pricing war escalates.
Final Thoughts on AMD Stock
AMD stock price has surged in the last four years as the company emerged from the brink of bankruptcy. However, the sideways movement in the stock is a clear indication that the markets are waiting for further catalysts.
Weak economic growth remains a concern, and AMD stock price will be negatively impacted by tougher competition.
While I am not entirely bearish on Advanced Micro Devices stock, I believe it makes sense to remain on the sidelines at this point. In the coming quarters, there is a higher probability of AMD stock price trending lower than moving higher.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
