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Don’t Get Too Comfortable with Advanced Micro Devices

Despite the challenges associated with the broader technology industry in 2019, Advanced Micro Devices (NASDAQ:AMD) seemingly has no shortage of upside momentum. In fact, very few publicly traded companies of any industry can keep up with the longer-term performance of AMD. Yet can this almost outrageous trajectory continue onward?

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At first glance, the answer appears a resounding yes. After a ho-hum year in 2017, Advanced Micro Devices put up an impressive return of over 77% last year. This year, shares are on pace for a 115% profit, which is simply ridiculous.

Not only that, plenty of fundamental factors bolster the idea that the stock price will maintain its outperformance. On the geopolitical level, a possibility exists that the U.S. and China will sign a substantive trade deal. Although fresh worries have sprouted over the still ongoing trade war, contrarians point to a political reality.

As you know, President Donald Trump isn’t exactly killing it in the opinion polls. Therefore, his path to an electoral victory in 2020 becomes dramatically challenged without a trade deal. On the other end of the hemisphere, China wants its domestic economy back on track.

Irrespective of the deal, though, the stock price has its own specific catalysts: premium-grade processors offered at comparatively reasonable prices. The chipmaker has turned in victory after victory. For example, Advanced Micro Devices will be the chip supplier for the next-generation consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT).

As well, AMD is hurting Intel (NASDAQ:INTC) in the data server market, producing high-performance chips that are notably cheaper than Intel’s offerings. Can anything stop the juggernaut that is Advanced Micro Devices?

Moore’s Law Could Stymie AMD

In the interim, making a determination for Advanced Micro Devices is an incredibly difficult proposition. Although the trade war is generally headed in the right direction, we know how that goes. All it takes to ruin investor sentiment is an ill-timed tweet from Trump.

However, I won’t deny that the AMD stock price has serious momentum. Combined with Intel’s supply chain mishaps, AMD is basically batting a thousand. Thus, in the nearer term, I can easily see shares moving higher.

But the long run is where the picture becomes a little murky. At the end of the day, the stock price won’t move necessarily on the chipmaker’s various technologies. Instead, it will move on investors’ belief in the company’s future growth and earnings forecasts.

And this is where I start to lose confidence in Advanced Micro Devices. The semiconductor industry’s growth generally follows a path known as Moore’s Law. According to the University of Missouri–St. Louis, this is a rule of thumb that the “number of transistors on an affordable CPU would double” roughly every year-and-a-half period.

However, we’re reaching a point where Moore’s Law is no longer valid. According to physicist Michio Kaku, “In about ten years or so, we will see the collapse of Moore’s law. …Computer power simply cannot maintain its rapid exponential rise using standard silicon technology.”

That’s not to say that semiconductors will no longer innovate. Rather, companies must dig deeper for incrementally smaller gains. Imagine squeezing out water from a wet towel. The first several drops are easy to wring out. But squeezing out the remaining water requires greater effort and the payoff isn’t as high.

That’s Moore’s Law in a nutshell. And it has serious implications for AMD because of its competition.

It’s Just Physics (and Money)

Say what you want about Intel’s bumbling efforts in comparison to high-flying AMD: Intel has vast resources to dive into AMD’s more modest means. As we head toward the tail end of Moore’s Law, we’re moving into alpha dog territory.

Again, the investment angle of Moore’s Law is that more input (resources) are required for less output. Much of Advanced Micro Devices’ success resulted from management wringing out the low-hanging fruit. But now the real game begins.

For AMD to decisively beat Intel, it must expend Intel-like money. I’m not entirely convinced if that’s a sustainable strategy. Recall that while AMD beat its third-quarter earnings estimates, it disappointed in Q3 sales and Q4 sales guidance.

So, even AMD’s push into the premium semiconductor space hasn’t necessarily translated into outstanding growth. Further, Moore’s Law will make subsequent efforts to unseat Intel increasingly difficult.

Like I said, for the nearer term, AMD stock resembles a momentum play. But for the longer term, I believe substantial challenges lie ahead. Because of that, I’m more comfortable risking a position with the bigger dogs of tech.

As of this writing, Josh Enomoto is long SNE.

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/moores-law-hampers-amd-long-term/.

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