In 2019, there was concern about Advanced Micro Devices’ (NASDAQ:AMD) high exposure to China during the U.S.-China trade war. (The days when the trade war dominated the business news headlines seem like a long time ago, don’t they?)
In 2018, Goldman Sachs estimated that about 26% of AMD’s revenue came from the Asian country. But now we’re in February 2020, when the majority of China’s businesses shut down for a few weeks and the country’s economy slowed tremendously due to the coronavirus from China.
Even if AMD has trimmed its exposure to China since 2018 (I couldn’t find a more recent estimate on the percentage of the company’s revenue that comes from China), I find it difficult to believe that the company’s first-quarter results won’t take a big hit.
I do know that AMD has said that it expects its Q1 revenue to come in at the lower end of its original guidance and that it maintained its original full-year top-line guidance. That, however, sounds way too optimistic for a company that likely gets 20% or more of its revenue from the country that has (with the possible exception of Italy) taken the biggest actual hit from coronavirus.
AMD Is Facing Other Short-Term Threats
Beyond coronavirus, the company is facing two other challenges that I’ve discussed at length in the past: product improvements and price cuts by Intel (NASDAQ:INTC), as well as AMD’s apparent inability to match Nvidia (NASDAQ:NVDA) and Intel when it comes to artificial intelligence. New developments in both of these areas have intensified my concerns about AMD stock.
Specifically, as I reported in a recent column on Intel, ExtremeTech stated on Feb. 26 that the giant chip maker intends to reduce the “per-core price for its Cascade Lake chips for servers.” Further, Intel is reducing the prices of its desktop chips and adding hyperthreading to them.
Meanwhile, the tech website Engadget reported that “Intel’s new desktop chips ‘should be competitive with AMD’s Ryzen 9 chips both in terms of performance and price.'” Engadget also stated that Intel’s chips would use more power than AMD’s offerings. But, as I noted in the previous article, I don’t expect that to meaningfully deter companies or consumers from buying Intel’s chips.
On the AI front, I reported that Rice University researchers, in collaboration with Intel, have “reportedly been able to radically increase the speed of Intel’s Xeon chips which are used for AI training. As a result, Xeon is now ‘3.5 times faster than Nvidia’s Tesla (chips) in AI deep learning,’ according to wccftech.”
Even before that innovation, AMD was seen as trailing Nvidia and Intel’s Habana unit when it comes to AI. But after this latest development, AMD is probably much further behind in the vital technology.
With the use of AI now an integral tool for data centers, AMD’s deficit in AI chips is likely to hurt it in the short-term and medium-term. And since data centers’ use of AI is expected to accelerate in 2021, this issue will be an even bigger problem for AMD in the longer term as well. As a result, I have serious doubts about the company’s ability to meet its long-term financial guidance.
Other Long-Term Issues
Some members of the Trump administration are pushing for new restrictions on U.S. chip exports to China, The Wall Street Journal reported on Mar. 9. Those restrictions “could cost U.S. chip makers about $36 billion in revenue,” a firm called Boston Consulting Group found, the newspaper noted.
With its heavy reliance on China, AMD would likely be heavily affected by such restrictions.
Meanwhile, China is rapidly accelerating its own chip production. As of November, it produced 16% of its chips, but it’s looking to increase that proportion to 40% this year and 70% by 2025, the BBC reported in November. Over the longer term, that could produce very bad news for AMD.
Valuation and the Bottom Line on AMD Stock
Despite its recent pullback, AMD stock is still trading at 42 times analysts’ average 2020 earnings per share estimate, so it’s not cheap. Meanwhile, its hit from the coronavirus may be bigger than expected and its lack of leadership on the AI front is likely to stymie its sales going forward.
Finally, its China business is facing mounting threats. In light of these points, I’d avoid AMD stock now.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.