Advanced Micro Devices (NASDAQ:AMD) has been a champion in the past few years, a champion in the semiconductor industry, and a champion in the pandemic. However, all of the successes it has had have also led to the current overvaluation of AMD stock.
While it is well positioned, the company also competes in a volatile, highly competitive industry. Legacy chip maker Intel (NASDAQ:INTC) dictates much of the industry’s direction still and exerts strong influence with deep pockets. It, along with Nvidia (NASDAQ:NVDA) are often mentioned in the same breath as AMD competitors. Rightly so. However, deep-pocketed cloud computing giants for which AMD has traditionally been a supplier, are quickly becoming competitors. Risks in the microchip industry are many, and AMD is hemmed in on all sides. But it is well-positioned to continue its winning ways.
AMD Stock Is Driven By Two Revenue Sources
AMD is where it is precisely because of its prowess. The company earns revenue from two primary categories: Computing and Graphics, and Enterprise, Embedded and Semi-Custom segments. And the remainder of 2020 looks promising in regard to projects therein.
AMD’s problem probably isn’t going to be creating revenue for the rest of 2020, but rather, maintaining its massive valuation and warding off competitors looking to erode its competitive positions. AMD probably can’t expect its meteoric price appreciation to continue and markets will adjust the valuation of AMD stock sooner or later.
Investors into AMD shares should know that price appreciation can likely only occur from fundamental improvements to its financial factors. Top line revenues and bottom line profits are going to be key.
Markets have already given it massive valuation. AMD’s price-earnings ratio is 121.72 at its price of $52.34 in early July. For comparison, Intel and NVIDIA trade at prices of 11.4 and 71.8 times their earnings, respectively.
Median values for P/E ratios in the semiconductor industry are around 30.
AMD Competes Well in a Tough Environment
As much as that might sound like a warning, it’s more a statement of fact. The company is having a strong 2020 and has big projects on the horizon. AMD’s net revenue rose from $1.27 billion in the first quarter of 2019 to $1.79 billion in Q1 2020. Increased sales of Ryzen processors and Radeon GPUs were largely responsible for the increase.
General industry consensus is that AMD has an edge over Intel in CPUs but is behind NVIDIA in GPUs. That said, AMD GPUs provide great bang for the buck in many cases. Unfortunately for AMD, both of these competitors are significantly larger.
Competition Will Stiffen For AMD Stock
Intel has massive resources that it will continue to leverage to direct the industry on a course that benefits it. This recent article by Dan Pelberg points to a recent development between Intel and Apple (NASDAQ:AAPL), which provides Intel such impetus.
Expect Intel to continue to pressure AMD on many fronts.
Dana Blankenhorn’s recent article points to the cloud computing company threats which often get glossed over in discussions regarding industry competition. These companies add pressure to AMD to perform and have massive resources at their disposal. They deserve equal shrift when mentioning AMD’s competitive landscape.
AMD’s Stock Is a Buy Due to its Strong Course
Luckily, or perhaps as a consequence of strategic vision, AMD is poised to continue to benefit from both its processors and GPUs. The Playstation 5 and Xbox Series X next generation gaming consoles will both feature AMD processors and GPUs.
AMD’s Q4 revenues should benefit nicely. The company traditionally is strong second half.
I believe AMD stock is a buy, but not a strong buy. Computing and Graphics revenue seems to be the direction that AMD will rely on for the next few years. The company has been highly volatile yet highly successful for the past few years.
Chipset makers face high pressures, but AMD seems to be making the right moves. Look for the company to continue growing.
But given its current valuation, assume that the markets can’t drive its price higher absent higher top and bottom line growth.