Shares of chipmaker Advanced Micro Devices (NASDAQ:AMD) — alongside the rest of the stock market — have fallen off a cliff over the past few weeks on concerns that the rapidly spreading coronavirus could put a bigger damper on global economic growth than previously expected. Specifically, AMD stock has shed about 20% of its value on concerns that the outbreak will significantly disrupt the supply of and demand for semiconductor chips for the foreseeable future.
These concerns, while legitimate, are overstated.
Coronavirus is a temporary problem. By the summer, it will be over. As a result, coronavirus-related supply-chain disruptions will be temporary, too. And the slowdown of global semiconductor demand will also be temporary. Both of those issues will be resolved by the middle of this year.
AMD stock is presently dropping into bear-market territory on those concerns. But those worries will soon pass, so the selloff of AMD’s shares will also end soon. Even further, the stock’s valuation has become attractive, while some of the company’s production in China is already coming back online, and it has an Analyst Day catalyst on the horizon which could ease investors’ concerns.
Connecting all the dots, we can draw three conclusions.
- The recent weakness of AMD stock is overdone.
- In mid-2020, AMD stock will be in full rebound mode.
- It’s probably safe to start buying AMD stock.
Given these three conclusions, I’m bullish — not bearish — on AMD stock following its selloff, which was caused by coronavirus.
The Weakness of AMD’s Shares Is Overdone
The coronavirus outbreak is a big, scary, and volatile thing, and the situation will probably get worse before it gets better.
But, rest assured, the situation will get better.
Warmer weather tends to end influenza outbreaks, and warmer weather will come in April and May. Meanwhile, many governments have been quick to respond to the outbreak, instituting strict quarantining. In China, such quarantining efforts worked to suppress the spread of the virus rather quickly. Only two months have passed since the onset of the outbreak, and the number of active cases in China is rapidly falling.
There’s also significant progress being made on potential vaccines and treatments. There’s evidence that Gilead’s (NYSE:GILD) remdesivir anti-viral treatment has effectively treated coronavirus symptoms. The U.S. government and top officials have also sounded an optimistic tone with respect to launching a vaccine within a few months. Wider distribution of these treatments and potential vaccines will help stop the spread of the virus.
Over the next few weeks, the number of new coronavirus cases outside China will explode higher. So will the death count.
But in April or May, warmer weather, coupled with strict quarantining, will ultimately kill the outbreak.
A Full Rebound of AMD Stock Is Coming
Once the coronavirus outbreak fades, AMD’s shares should rally.
Supply chain disruptions have been investors’ main concern when it comes to AMD stock. Specifically, the coronavirus outbreak in China forced the country to close essentially all of its factories. A lot of AMD’s products are made in those factories. So when those factories went offline, AMD’s supply chain got massively disrupted.
That’s the bad news. The good news is that China is already starting to re-open its factories. Sure, it will take a while for the factories to get back to full production. But it seems likely that — given how rapidly the spread of coronavirus has slowed in China — those factories will get back to full production by late April or early May. If that’s the case, then AMD’s supply issues will be entirely gone within two months.
The other big concern at this point is a demand slowdown. The more coronavirus spreads, the more businesses worry about such a slowdown developing, and the more they get uneasy about what’s going to happen next. Uncertainty is the enemy of investment, so the more uncertainty the coronavirus outbreak creates, the less businesses will spend on things like AMD’s CPUs and GPUs.
But, assuming the rest of the world follows a China-like trajectory, then in late April or early May, the coronavirus outbreak will be dying down. History shows that when modern epidemics fade, global economic activity rebounds sharply. There’s no reason that won’t happen this time. Indeed, there’s reason to believe the rebound will be sharper than history suggests, given that multiple central banks are taking measures to fight the outbreak.
All in all, then, AMD’s fundamentals should improve dramatically between today and the summer.
The Bottom Line on AMD
AMD stock will be a long-term winner. Investors should not let near-term coronavirus fears chase them out of long-term winners like AMD. They should, however, be patient when buying the dip of AMD and avoid buying all the shares they want to purchase at one time. Coronavirus is a rapidly evolving situation, and there will likely be many more negative headlines about it.
But it seems like the worst is mostly in the rear-view mirror, so it looks safe to start buying AMD stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
