When Lisa Su took the helm in October 2014, the market value of AMD (NASDAQ:AMD) was $4 billion, and at the time, the expectations were that things would only get worse. There was actually buzz that the company was headed for bankruptcy. Fast forward to today: The market cap on AMD stock is at $56 billion.
Getting here certainly was not easy and was met with lots of skepticism, but Su had a solid strategy. Early on, she struck a key partnership in China that resulted in a slug of much-needed capital and outsourced manufacturing. Then she would aggressively cut costs but also focus on innovating the product line.
Because of all this, AMD is no longer a follower to the mighty Intel (NASDAQ:INTC). Instead, the company is trailblazing the industry with new offerings.
Just look at the recent CES conference. AMD announced the next-generation of the Ryzen Threadripper, which includes a hefty 64 separate computing cores on a chip. There was also the Ryzen 4000 Mobile that is focused on laptops. For the most part, it handily exceeds the performance of Intel’s Ice Lake chips.
All this is definitely great. But as is common with hot tech stocks, things can get, well, too hot, and I think this is the case with AMD. It would not be a surprise to see a reversal.
So what are some of the reasons? Let’s take a look at three:
1. Valuation
During the past 12 months, AMD stock has jumped a blistering 144%. But of course, this was not a one-off. For the past five years, the average annual return was close to 79%.
The bottom line: AMD has gotten very expensive. The current forward price-to-earnings ratio is 43X. By comparison, Cirrus Logic (NASDAQ:CRUS) trades at 25X and NVIDIA (NASDAQ:NVDA) is at 34X.
Wall Street is also wary of AMD stock, with the average price target at $40. This assumes 21% downside from current levels.
2. Growth
During the latest quarter, AMD reported he highest quarterly revenues since 2005 as well as the highest gross margin since 2012. All this was due primarily to the surge in growth from 7nm Ryzen, Radeon and EPYC processor sales.
The fact is that AMD has been cutting into Intel’s market share. For example, the company’s position in the global server market recently hit 3.6%, up from 1.4% a year ago. There was also a nice increase in the PC market from 10% to 15%.
A key driver for this has been AMD’s technology advantage of its 7 nanometer chip technology. But Intel has also suffered from self-inflicted wounds, such as from delays and product quality issues.
Yet this situation won’t last, of course. Intel has been taking actions to get things back on track. The company also has the advantage of massive global scale. What’s more, Intel may get more aggressive on pricing, which will certainly put pressure on AMD.
3. Artificial Intelligence
Yes, a potentially enormous growth opportunity for AMD stock is AI. Consider that Graphics Processing Units have proven to be quite effective for this technology because of the high compute power, energy efficiency, low cost and parallel processing
But there’s a problem: AMD has been lagging with AI. Then again, the company still is constrained in terms of financial resources and talent.
Rather, it’s NVDA that is continuing to build on its leadership position with GPUs, which is backed by $17 billion in R&D since 1999.
The company has been aggressive in developing software, like CUDA, and data repositories. There is also a global ecosystem of partners. In other words, it will be increasingly difficult for AMD to make inroads in this valuable category.
The Bottom Line on AMD Stock
As these challenges come to the fore they’re going to become a drag on the stock. To be clear, AMD still is a really solid company, but, as with so many other tech companies, it will have to keep proving itself during the downtimes.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
