Buy Advanced Micro Devices on Coronavirus-Led Weakness

History shows that previous virus outbreaks have not meaningfully hurt semiconductor growth

Share of central processing unit (CPU) and graphics processing unit (GPU) maker Advanced Micro Devices (NASDAQ:AMD) fell in late January, alongside the rest of the stock market, on concerns that continued spreading of the Wuhan coronavirus will negatively impact the company’s growth trajectory. As of this writing, AMD stock has fallen about 5% in just a few days.

3 Reasons AMD Stock Looks Very Stretched Right Now
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The rationale behind the weakness in AMD stock is simple, and ostensibly hard to argue against.

The coronavirus outbreak in China is only getting worse. As it gets worse, the adverse economic impacts will become more severe. Strength in the semiconductor market — and in AMD’s core CPU and GPU markets — is traditionally tethered to strength in the global economy. Consequently, if the coronavirus does get worse, the global economy, the semiconductor market and Advanced Micro Devices’ growth trajectory will all meaningfully slow.

But, history shows us that this won’t happen.

Instead, history shows us that virus outbreaks in China — which aren’t that uncommon — normally don’t have much of an impact on semiconductor market activity. Traditionally, semiconductor stocks drop on virus-related concerns. Semiconductor market activity doesn’t slow. Semiconductor stocks bounce back.

The same dynamic will play out this time around. As such, I think this coronavirus-led weakness in AMD stock is a buying opportunity, and nothing more.

Coronavirus Concerns Are Overstated

When it comes to AMD stock, coronavirus concerns are overstated.

First, it should be noted that the current Wuhan coronavirus outbreak is significantly less severe than prior virus outbreaks in China. Indeed, back in 2002, there was an outbreak in China of severe acute respiratory syndrome (SARS), which was far more pervasive. Doctors confirmed 8,000-plus cases, and currently have confirmed less than 3,000 for the current virus. It was far more lethal (10% mortality rate, versus 4% mortality rate for Wuhan) and far more global (over 100 suspected cases in America, versus just five confirmed cases for Wuhan).

The historical outbreak was also far less contained. It took six months from 2002-2003 outbreak’s discovery for response teams to stop it. Response teams today, however, have already locked down cities, constructed new hospitals, issued quarantines and are making progress on a vaccine … all in less than a month after the Wuhan coronavirus was first spotted.

Second, while virus outbreaks in China do tend to have adverse economic impacts, those adverse impacts traditionally do not extend into the semiconductor market. SARS didn’t hit the semiconductor market in 2002 — semiconductor sales actually rose during the SARS outbreak. The same was true for the H7N9 outbreak in the 2010s.

Specific to the SARS outbreak, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) dropped in early 2003 from $45 to $35 on SARS-related concerns. But, semiconductor sales growth didn’t slow in 2003. Instead, sales kept rising. As they did, semiconductor stocks bounced back. The SOXX exchange-traded fund closed the year above $60.

Advanced Micro Devices Will Bounce Back

History says that Advanced Micro Devices will bounce back from recent weakness. The fundamentals agree.

Here’s how things will play out. The Wuhan coronavirus outbreak will create enough worry to push investors into bonds and keep central banks in supportive positions. That implies lower rates, more liquidity and better economic conditions. At the same time, given how much quarantining has been done and how much progress has already been made on a vaccine, the Wuhan coronavirus will likely stop spreading within the next month, and the virus will be largely contained (if not all together eradicated by a vaccine).

By March, it is likely that coronavirus concerns will have largely disappeared, while economic conditions will have meaningfully improved.

Against that backdrop, corporations will have a ton of confidence to up CPU and GPU spending. That’s especially true because, over the next 12 months, next-generation technologies like 5G and cloud gaming will become a mainstream reality. Demand for CPU and GPU products will soar. Demand for AMD’s CPU and GPU products will soar double-fold, because the company still has the leading 7-nanometer products in the market.

Over the next few months, the fundamentals underlying AMD will improve, not deteriorate. As they do, AMD stock will go higher, not lower.

Bottom Line on AMD Stock

The coronavirus is just a minor bump in the road for AMD that won’t meaningfully impact this company’s growth narrative. As soon as coronavirus concerns blow over — and they should within a month or so — AMD stock will get back to rallying.

So, the game plan with AMD stock is simple. Be patient. Let the stock drop. Gradually buy into this weakness. Let the concerns blow over. Let shares rally back to new highs.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/buy-amd-stock-on-coronavirus-weakness/.

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