The legend of Advanced Micro Devices (NYSE:AMD) CEO Dr. Lisa Su keeps growing.
The chip being used is a standard part. But AMD and Microsoft now have a multi-year agreement for semi-custom parts assuring a steady flow of orders for years to come.
As hardware has become software, with companies like AMD becoming fabless, the role of cloud giants like Microsoft, Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) keeps growing. These companies have the capital to dominate chip production. Keeping them close is the key to survival, but it’s not the only key.
AMD Still Small
As trade opened Oct. 8 AMD had a market cap of $31.45 billion, while Microsoft had a market cap of $1.041 trillion. AMD is also, still, a small player within the chip market. Graphics chip rival Nvidia (NASDAQ:NVDA) is worth $112 billion. Processor rival Intel (NASDAQ:INTC) is worth $221.6 billion.
AMD’s small size has been an advantage for investors. At its opening price of $28.93 per share AMD has been a 10-bagger for those who got in as recently as early 2016, when the stock was trading at $2.14 per share.
AMD sales, in the wake of last year’s inventory glut, are now running at $6 billion per year, 50% more than just three years ago. Within the industry that’s an awesome growth rate. But AMD only had profits of $35 million in its June quarter, on $1.531 billion in sales.
For the September quarter, to be reported Oct. 29, analysts are expecting a dramatic improvement, sales of $1.8 billion and profits of 18 cents per share, roughly $210 million. That looks like a high bar. The “whisper number” analysts are speculating on is a profit of 17 cents. A “whisper number” below the official forecast is a bearish signal.
AMD Stock and the Problem of Being Small
There are other problems with AMD’s small size.
The decision by Apple to have Taiwan Semiconductor (NYSE:TSM) make its A13 bionic chip for the iPhone 11 line means AMD is now “struggling for production” at that facility. There’s no alternative supplier, because TSM is the only fab that has perfected the 7 nm processor that’s key to AMD’s product leadership.
The Apple move also hurts Nvidia, with which AMD is competing in graphics chips. It’s all an outgrowth of what I call “Moore’s Second Law,” that the costs of starting chip production escalate as the gap between circuit lines gets smaller. TSM has become the whole industry’s bottleneck.
TSM’s success has made it more valuable than Intel, at $238 billion. It could yet be a player in the ongoing tug-of-war between the U.S. and China. Taiwan is nominally independent, but Chinese have been taught from birth it’s just as much China as Hong Kong is. Escalation, and a move against the island, which holds its election in January, could break the whole tech economy.
Bottom Line on Advanced Micro Devices Stock
Dr. Su, who was born in Tainan, Taiwan in 1969, has brilliantly navigated AMD’s way among the giants of the chip and cloud industries. The only problems faced by the company’s Ryzen processors and Radeon graphics processors are supply constraints. Those constraints point straight back to her home island.
AMD is well-positioned for continued success, in a business sense. But investors should know that the geopolitical risk for everyone in the space is rising with every tweet and every Chinese response. A bet on AMD today is a bet on peace as well as on Dr. Su.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and MSFT.