Even before the coronavirus from China caused a mass selloff on Monday, Advanced Micro Devices (NASDAQ:AMD) stock appeared to have run too far, too fast. But with the outbreak threatening to become a pandemic, it may be time for investors to adopt a more cautious approach towards AMD stock.
First, we may need a rethink our view of the coronavirus. In particular, the acceleration of its infection rate is worrisome. Initially, several analysts as well as mainstream journalists encouraged Americans not to panic by comparing the coronavirus to the flu. The latter regularly kills more people than the former has, with the implication that we must put this crisis into context.
While I don’t think panicking is helpful, I also believe that the comparison represents a false equivalence. Yes, the flu has killed more people, but it’s also something that many, if not most, people get at some point in their lives. As a result, the fatality rate is very small. In 2017, the estimated death rate for flu and pneumonia was 14 per 100,000 cases in the U.S., or 0.00014%.
On the flip side, the fatality rate for the coronavirus is cause for serious concern. As of earlier this week, there were 77,658 cumulative infections globally and 2,663 deaths, equating to a fatality rate of 3.4%. Simply put, that is staggering.
For AMD stock, which has significant exposure to China, the news couldn’t have come at a worse time. The company will likely incur more damage from the coronavirus than rivals such as Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
AMD Stock to Disproportionately Suffer from the Outbreak
The coronavirus may become a pandemic. If that scenario plays out, most industries would be threatened. And as recent trading shows, Intel and Nvidia shares won’t escape volatility and major declines by their shares.
However, among the semiconductors, AMD stock clearly had the most momentum. I liken Advanced Micro’s aggressive and disruptive strategy to a boxing match between an underdog and a world champion. Frankly, AMD caught Intel with its pants down. Further, Intel didn’t do itself any favors with unnecessary controversies, as well as a painful supply-chain backlog.
Thus, AMD was taking it to Intel, launching one innovative chip after the other. Additionally, the smaller semiconductor firm began taking market share in the data center arena, a place where Intel previously dominated. Not surprisingly, Intel was on the ropes, doing its best to play damage control.
However, the coronavirus is the referee coming in not only to signal the end of the round, but also the end of the match due to a facility emergency. Both AMD stock and Intel will suffer due to a disruption of their industry.
To be fair, Advanced Micro has some protection from the coronavirus. Primarily, Taiwan Semiconductor (NYSE:TSM) develops AMD’s next-generation chips. Obviously, Taiwan is not China. Still, reports suggest that it, too, could suffer severely from the outbreak.
Setting that speculation aside, I just wonder what the demand for AMD’s flagship products, such as gaming-centric GPUs, will be in the coming months. With the coronavirus proving to be far worse than first forecast, we could see more red ink before conditions improve.
The Smarter Bet Is to Play It Safe
Given how sensitive AMD stock is to China-based revenue, I think the smarter bet is to wait this out. Based on what we know about this virus, a real possibility exists that even right now, we still don’t understand the seriousness of this outbreak.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
