The Microsoft Deal Won’t Give AMD Stock the Bump You Might Think

My esteemed InvestorPlace colleague, James Brumley, recently discussed Advanced Micro Devices (NASDAQ:AMD), suggesting that “AMD’s Microsoft (NASDAQ:MSFT) partnership looks like a big win for the chipmaker and should boost AMD stock over the longer term.”

The Microsoft Deal Won't Give AMD Stock the Bump You Might Think

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Clearly, the fact that Microsoft is venturing out to other suppliers beyond Intel (NASDAQ:INTC), is good news for Lisa Su and the rest of the AMD management team. 

And while I have oodles of respect for what Su’s accomplished over the past five years in the top job, like everyone on this planet, she’s expendable. 

It’s Not the Time to Buy

The August rumors (unfounded) Su was bolting for IBM (NYSE:IBM) caused a stir for a short time, but ultimately it was the uncertainty facing AMD and the rest of the semiconductor industry that brought Advanced Micro Devices stock back into the $20s, down from its 52-week high of $35.55 reached in early August.

While the partnership with Microsoft has been good for AMD’s reputation, InvestorPlace’s Laura Hoy, who’s ranked 35th out 6,939 TipRanks bloggers, believes investors ought to wait until AMD stock falls below $27 to buy. 

Given her remarkably consistent TipRanks rating, I’d take her recommendation seriously and wait.  

In mid-September, I suggested that investors wait until the mid-$20s to buy. I don’t believe anything, including the Microsoft partnership, has done anything to change my opinion about AMD stock. 

Until insiders start buying, it’s overpriced.

However, if you’re in the same camp as my colleague and believe that the Microsoft partnership is going to create dividends for AMD for years to come, I’d think again. 

Microsoft is the winner of this partnership. Here’s why.

A Small Portion of Its Business

As Brumley stated, Microsoft is still going to offer a Surface Laptop 3 with an Intel CPU to go with an AMD version, which means AMD isn’t going to reap as much from this move as one might think.

In fiscal 2019, the Surface generated $4.8 billion, 23% higher than a year earlier. Almost 100% of this revenue came from Intel-powered laptops. That will obviously change in fiscal 2020. However, it still won’t represent a big chunk of revenue for AMD.

“If the Surface Laptop 3 proves to be a hit, it could change AMD’s reputation from lagging Intel in the high-performance CPU segment. This could encourage other laptop OEMs (original equipment manufacturers) like Dell, Lenovo, and even Apple to consider AMD Ryzen for their flagship products,” stated Market Realist contributor Puja Tayal recently. 

If, if, if. 

As Tayal suggested, this win for AMD has everything to do about street cred and little to do with volume or revenue. After all, the Surface laptops accounted for just 3.8% of Microsoft’s $125.8 billion in 2019 revenue. 

Microsoft could easily abandon hardware and not miss a beat, although it probably won’t, because it gives itself a proprietary product to experiment with Windows, Office, etc.

But don’t think Microsoft is about to create a gravy train for AMD. 

The Bottom Line on AMD Stock

I don’t think there’s any doubt that Advanced Micro Devices is a much better company than it was five years ago. 

To get to $40, however, AMD is going to have to generate positive free cash flow on a consistent basis, something it’s failed to do up to this point in its transformation. 

Thus, while it sounds good to say AMD’s got a Ryzen CPU in one of Microsoft’s flagship laptops, it won’t amount to a hill of beans if it can’t put them into other OEM flagship products.

In the meantime, Microsoft gets to pit one supplier against another. May the best company win. 

To me, the winner of the AMD/Microsoft partnership is… Microsoft! 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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