Advanced Micro Devices (NASDAQ:AMD) took out its dot-com era high on Jan. 2 with bulls confidently predicting more gains.
The stock reached $49.10 per share. But the air strike against Iran’s military leader was sending all stocks down Jan. 3. AMD was down in pre-market trading, opening this morning at $46.86.
At its Jan. 2 closing price, AMD had a market capitalization of $57 billion, on estimated sales of $6.1 billion. But analysts say the party should continue. Rosenblatt Securities has a one-year price target of $65 on the shares.
New Rival, New Danger
Missteps by Intel (NASDAQ:INTC) under former CEO Brian Krzanich gave AMD an opening in the 2010s to take the lead in chip technology. Under Lisa Su, AMD has capitalized through a strong alliance with Taiwan Semiconductor Manufacturing (NYSE:TSM), whose fabrication plants can deliver chips with lines 7 nanometers apart. Intel is still mastering 10-nanometer technology.
TSM’s capacity is now fully booked, with AMD set to double production.
But there’s a new competitive threat. AMD is getting extra 7-nanometer capacity in the second half because Apple (NASDAQ:AAPL) will be using new TSM lines to make chips with lines 5-nanometers apart.
The entry of cloud companies into chip-making could scramble the technology board. Hardware is increasingly defined by software, and the enormous financial resources of the big cloud names mean they’re taking their place in it. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) all have projects for creating their own fast data center chips.
Apple’s 5-nanometer chips are expected to go into the next iPhone. Apple has been using 7-nanometer technology since 2018, meaning the current iPhone has more power than most thin laptops. Apple is doing in technology what Lululemon (NASDAQ:LULU) has done in clothing. It controls both the manufacturing and the retailing, disintermediating the rest of the industry.
While AMD was hitting its record high Jan. 2, so was Apple, which closed over $300 per share, a market cap of $1.3 trillion. For those scoring at home, that’s over 20 times bigger than AMD.
Beating Nvidia?
Intel is AMD’s traditional rival. Nvidia (NASDAQ:NVDA) is its newer rival, in graphics chips.
While AMD is ahead of Intel, it remains behind Nvidia, but only slightly. Its latest laptop graphics chip, the RX 5600M, will be combined with the Ryzen 4000 “Renoir” to produce gaming computers that are “cost effective” compared with solutions combining Nvidia chips with Intel processors.
Thus, AMD Chief Technology Officer Mark Papermaster remains optimistic. He said the company’s “roadmap” for future chips now goes out two generations, or about three years, and the firm has the capacity to sustain that pace of innovation.
The confidence from AMD, and the anticipation of tech growth generally, has created some irrational exuberance in the stock, according to Seeking Alpha’s Kwan-Chen Ma. Speculators are pricing AMD for perfection. But oceans rise and empires fall, meaning every price is subject to external events.
The Bottom Line
AMD, and all tech stocks, should expect a hard fall over the next few months, as the world’s markets adjust to war-time conditions.
A rotation into oil and defense stocks, away from technology and gaming, is going to hit AMD shares hard because they’re already priced at nearly 10 times revenue.
Despite this, AMD management is controlling what it can control. It has the design teams and the alliances to maintain and even expand share in the areas where it competes. In terms of price for performance, its server chips are still considered bargains.
Wait for the shakeout, then consider buying.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL and MSFT.
