Advanced Micro Devices Is a Curious Defensive Play

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Advanced Micro Devices (NASDAQ:AMD) shares opened May 18 near their pre-pandemic high and they’re likely to go higher. AMD stock was trading at almost $55 in the pre-market. The all-time high of $58 is within reach.

AMD Stock Will Remain Resilient and Potentially Trend Higher

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Optimism is based on the idea that the pandemic is easing and that AMD chips can still knock the socks off rival Intel (NASDAQ:INTC).

Tech stocks have been resilient in the face of the novel coronavirus. AMD earned $166 million, 18 cents per share, during its March quarter. This was very close to the $170 million earned in the December quarter. The company next reports on July 28, with 12 cents per share of earnings expected.

Why AMD Works

CEO Lisa Su inherited some great design ideas when she took command in 2014. She has not only executed on them but expanded the lead. AMD Ryzen chips now have a dominant mindshare in desktop CPUs. In some outlets they have a dominant market share as well.

AMD desktop chips are delivering the best price performance in the industry, according to tech writers. Its fastest chips have significant pricing power, selling for more than the equivalent Intel silicon.

AMD would also benefit if chip fabrication giant Taiwan Semiconductor (NYSE:TSM) builds a new plant in Arizona. TSM’s fabrication capability is superior to Intel’s. Having supplies in the U.S. would make AMD more resilient.

AMD competes with Nvidia (NASDAQ:NVDA) in the area of graphics processor units (GPUs). But Nvidia is helping AMD take Intel central processor unit (CPU) share in data centers. AMD Epyc processors are replacing Intel Xeon servers on Nvidia boards it’s selling to cloud companies. The new boards feature interconnects from Nvidia’s new Mellanox unit.

AMD Getting Pricey

Despite all the good news, AMD stock is getting expensive.

The company now has slightly over $7 billion in revenue each year. Its market cap is now $63 billion. This means you’re paying nine times current revenue for your shares. Earnings, however, are negligible, and AMD does not offer a dividend. By comparison, Intel sells for less than four times its revenue and sports a 33 cent per share dividend that still yields 2.33%.

This has caused many stock analysts to recommend Intel shares over those of AMD. I have made that mistake myself. But AMD keeps delivering capital gains, its price having nearly doubled over the last 12 months. Intel, by contrast, is up just 30% in that time.

AMD’s performance, on the other hand, badly trails that of Nvidia. It’s up 18% so far in 2020, while Nvidia is up by 49%. Nvidia sells for 19 times revenue, making AMD look cheap by comparison.

The point is that investors are paying a huge premium for any stock that can resist the coronavirus. Their price-performance, relative to the market, should fall once the pandemic is past. But while investors seem to think the worst is over now, scientists disagree. A second wave is not priced-in to stocks.

The Bottom Line

The possibility of a second wave means AMD is, despite its high price, a defensive stock.

In normal times AMD’s price and lack of dividend would lead me to conclude it’s ready for a hard fall. The Federal Reserve’s helicopter money, however, mostly landed on investors and in corporate board rooms. This has kept asset prices high, especially good assets like AMD stock.

Should a second wave of infection hit, AMD is likely to resist it. But after that wave passes and the economy begins to recover, you will want more diversification in your portfolio. Think of today’s AMD shares, then, as the equivalent of cash. If you get a gain, that’s fine. But you won’t lose much money here until the crisis is over.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in NVDA.

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.


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