Why Advanced Micro Devices Stock Is Bound to Take a Dive

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When a stock is captured by momentum traders, investors should head for the lobby and grab popcorn. That’s what has happened to Advanced Micro Devices (NYSE:AMD) stock.

Why AMD Stock Is Bound to Take a Dive

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It’s a fine company that makes very fine semiconductors. Its Ryzen chips are faster than those of Intel (NASDAQ:INTC). Its Radeon chips are competitive with the artificial intelligence chips of Nvidia (NASDAQ:NVDA).

But it’s not worth 10 times revenue, or anything near it. Its margins are wafer thin, and its growth is uneven. Traders began buying it because other people were buying it, sending the shares as high as $59 each.

Now those same traders are frightened of the coronavirus from China and they are selling the same way they were buying. As such, we might expect AMD stock to head lower today. (It’s down more than 7% at the time of this writing).

What’s There Is Cherce

As Spencer Tracy said of Katharine Hepburn in the movie Pat and Mike, “Not much meat on her, but what’s there is ‘cherce’.”

In 2019, AMD earned $341 million, about 35 cents per share, on revenue of $6.73 billion. The company weathered a slump in chip sales from 2018 and came back strong. Fourth quarter revenue was $2.13 billion, against first quarter revenue of $1.27 billion.

AMD spent decades looking up to Intel in microprocessors, but now looks down on it. This was a $2 stock in early 2016. It was literally as cheap as chips.

I began pounding the table for AMD stock back in 2014, when Dr. Lisa Su was hired to replace Rory Read as CEO. Read had left a solid product roadmap. He had sold the company’s chip foundry to focus on design. Su only needed to execute.

She has done that brilliantly. The market cap has gone from about $3 billion to nearly $60 billion. The company is now making inroads into the data center market, Intel’s last stronghold. Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) announcement of Google Cloud instances powered by AMD  sent the stock to its latest high.

Not Much Meat

AMD is still a minnow in the wine-dark chip sea. Intel is worth over four times more, at $265 billion. Its revenues are more than 10 times higher, at $72 billion.

AMD relies on Taiwan Semiconductor (NYSE:TSM) for its chip fabrication. TSM has lately been executing on Moore’s Law’s promises better than Intel. It’s making chips with circuit lines 5 nanometers apart, while Intel is still on 10 nanometers. This gives AMD a huge advantage that goes beyond its designs. But it’s an advantage held by TSM, not AMD.

AMD has hit the market’s sweet spots. The evolution of graphics chips into processors for the artificial intelligence revolution, pioneered by Nvidia, has helped AMD. Analysts think AMD could grow its revenues by 30% this year.

But no one is growing anywhere if the new virus isn’t contained. This was all the excuse momentum traders needed to sell.

The Bottom Line on AMD Stock

Investors should ask what AMD is worth before placing new buy orders.

If you bought several years ago, take profits here and wait for things to settle down. If you only got in recently, I would sit tight and let it grind its way back.

The question then becomes where to get in. Intel is selling at about 4 times revenue, with a price-to-earnings ratio of 13 and a dividend yielding 2%. Having run-up 40% over the last year, Intel remains a sleeping giant, fully capable of making up lost ground, and it’s still dominant in server chips.

AMD stock may go much lower before rebounding. You can afford to wait for it.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/amd-stock-bound-to-dive/.

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