Wall Street went nuts yesterday over semiconductor stocks. Micron (NASDAQ:MU) — for example — spiked 4.4%, while the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) was also up 1.8%. Strangely, the three main chip stocks that had been strong drivers fell, but they remain the better bet going forward. In fact, they are Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC).
I have been a long time fan of AMD stock, and I’ve written many times about catching almost every substantial dip. I have even written about doing the same for MU stock, but only when all the experts hated it. Today, I will again take cues from the action in AMD, NVDA and INTC. Meaning that chasing Micron and the rest in their spikes will eventually be a mistake. And while this is not the same as suggesting to short them, I am merely pointing out that there might be better starting points in semiconductor stocks.
My caution stems mostly from extrinsic factors, nothing against the companies themselves. Again, I stress that I remain committed to buying dips in these great stocks — especially AMD. In fact, the last time Wall Street was hating them, I wrote about the upside opportunity that paid the bulls very well. Keep that in mind later if you get the impression that I am a perma-bear on tech.
The devastation in businesses across the planet is the first of its kind. Never before has the world stopped working on demand and for this long. That said, it is not a surprise to see governments spending maybe as much as $50 trillion to emerge from this depression. The fact that we’ve never seen this before should raise concern. Yet, the actions on Wall Street are astonishing.
Some experts call it courage, but I think it is premature confidence and borderline recklessness. We need proof that the new normal is going to be good enough. The business cycles are different between sectors, but in the end they are all tied. If we have sustained periods where 30 million people are out of work, then there won’t be many tech upgrade boom cycles
So, as I said previously, the three semiconductor stocks we are looking at today are:
- Advanced Micro Devices
When I do decide that it’s time to go bullish, I will bet on AMD, NVDA or INTC in that order. Let’s dive in.
Semiconductor Stocks to Trade: Advanced Micro Devices (AMD)
AMD stock is the king of the S&P two-years straight, so I have to respect its price action.
The weakness it showed yesterday should concern everyone, especially in tech stocks. When a leader hesitates, there usually is a reason why. I’ve used AMD stock as a gauge for risk appetite for a while, and it has rarely lied to me. Investors should still buy the dips in it, but rushing in now is fraught with danger. Nothing has changed regarding its prospects, though, and that is part of the thesis.
The world is just emerging for the biggest mess on record. There is no chance we go back to prior conditions this year. And while I do like the fact that semiconductor stocks sales cycles are not as closely tied to retail, they definitely depend on consumer spending. So if the world doesn’t go back to full employment, that cycle will remain stifled.
The good news for AMD is that it has excellent leadership. The bad news, however, is that it is not a cheap stock. It has a three digit trailing price-earnings (P/E) ratio, and that means that it has a lot of fat to shed during economic trouble. Wall Street has tremendous confidence in CEO Lisa Su, but if the world is broken she can’t fix that part alone.
Once again, I remind you that I am merely tempering enthusiasm not calling for an outright short.
This year, investors fell madly in love with NVDA stock and it is leading the sector — up nearly 50% so far.
This is 10 times better than the SMH and INTC stock, and at least three times more than AMD stock. The experts are now again in agreement that it can do no wrong. This has happened before because the consensus was this bullish going into October of 2018. However, it then collapsed more than 50%, and had few fans even under $130. I wrote about the bullish upside back then because it was obvious.
Alas, this is not the case now, but not so much because I don’t believe how good this company is. My concern is over the general global state of affairs. Regardless of how great Nvidia is, the stock is not going to rally if the rest of the market is in shambles. I do give it credit for the positioning it has into the future of tech, but the case is timing of the trade. At these levels, there is a good chance of disappointment — but count me in on the dips into $290 per share. If you think that can never happen, I remind you that it was there about a month ago.
The overall prospects seem great because of their technical expertise. Moreover, the world is finally going all digital, and this assures that Nvidia will be a leading provider of tech brains for at least a decade. That said, I would not short this stock based on weak fundamentals because they are not so.
For the last few years, it felt like INTC stock was the step child that doesn’t get any love or credit. This is perhaps from the lack of strong leadership. But maybe that will start to change because the stock is somewhat keeping up at least with AMD.
Long term, the demand for tech is so great that there will be room for all three of these stocks to thrive. It’s almost a similar situation to the duopoly with Boeing (NYSE:BA) and Airbus. Each may win a battle here or there, but in the long run, they are both booked solid for a decade out.
Fundamentally, INTC stock is the cheapest of the three here. It has a trailing P/E ratio of 12, and price is 3.6 times sales. This is five times cheaper than NVDA on both counts. The comparison to AMD, though, is slightly different because AMD’s P/E ratio is ten times bigger, but its price to sales is only twice as big. NVDA is clearly the most expensive because of its 18.6 times sales price. That is a lot of upside hopium for the sales metric.
And while cheaper is not necessarily better especially for growth stocks, similar stocks should have comparable valuations. INTC stock sticks out as perhaps too cheap, and that raises the concern that there might be a legitimate reason why that remains true.
Usually I would trade the sector ETFs, but in this case, I want to avoid the likes of Micron — for example. They are rallying too much, which is not their usual behavior, and I remember when the experts called MU stock a “value trap” when it was under 30 and with a P/E ratio under 3. It is now 10 times more expensive, and they are buying it with voracious appetite. This leaves a lot of room for error.
That said, however, using these three proven champions is more attractive from a trading perspective.
AMD stock led for the past two years, and Nvidia is shining this year. Intel is the cheapest of the bunch, so it will also get some sympathy love. And that would be my order of preference today.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.