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Get Ready for the Rally on Advanced Micro Devices

AMD stock has snapped out of its doldrums

Until the middle of July, Advanced Micro Devices (NASDAQ:AMD) was trading in a narrow range. Then the stock jumped nearly 10% in just a few trading days. And it looks like AMD stock just got another catalyst.

AMD Stock is Going From Strength to Strength but Beware of Its Valuation
Source: Akura Yochi / Shutterstock.com

Intel (NASDAQ:INTC) announced it will not be releasing its 7-nanometer (nm) chips for six months. Intel’s misfortune works to the benefit of AMD, which already produces 7nm chips. And that’s actually an understatement. AMD’s Ryzen CPUs are dominating the 7nm market. And the company recently announced plans to introduce its next generation, Zen 3, for the consumer market later this year.

Analysts already knew that AMD was planning to introduce Zen 3 for data centers. So, this news just adds to the hype over the stock.

That’s pretty impressive for a company that issued cautious guidance at its last earnings report. But although AMD has set a lower bar, it still has to deliver. And investors will be watching to see what guidance the company offers when it reports earnings on July 28.

AMD Stock Is Expensive, But…

By virtually any metric, AMD stock is overvalued. But the stock market is illustrating that value is truly what other people are willing to pay. Does that automatically disqualify AMD stock from being a buy? Certainly not. The proof is in the performance. And in 2020, AMD has outperformed both the S&P 500 index and the PHLX semiconductor index.

Nevertheless, it’s something to consider. As InvestorPlace contributor Mark Hake summarized, a high valuation may hurt AMD stock growth. AMD stock is reaching all-time highs, which leads to questions of whether investors are already factoring in all the stock’s growth.

Schooling the Competition

Data centers. Gaming consoles. Work from home arrangements. All of these segments will define the semiconductor industry for at least the rest of this year. However, all three markets are likely to continue to dominate our national conversation long after the pandemic is over. And AMD is crushing it in all these categories.

Now let me add another one, online learning. With every passing day, it becomes less likely that K-12 students are going to be returning to school. And it doesn’t stop there. Many universities plan to welcome students back to campus. But that doesn’t mean students will be going to class…in person anyway.

The takeaway is that students are not only going to have to be connected. They’re going to have to have laptops and tablets that are capable of handling the speed and processing power to handle the demands of remote learning.

How Serious Is the Loss of Revenue from China?

There is no shortage of story lines surrounding AMD stock. And the abundance of story lines is creating both strong bullish and bearish opinions. In addition to Hake’s words of cautions, Larry Ramer wrote an article that caught my eye. Ramer was speculating about why AMD was merely reiterating its guidance rather than being more bullish like Intel and Nvidia (NASDAQ:NVDA), Micron (NASDAQ:MU), and Xilinx (NASDAQ:XLNX).

The answer that Ramer came up with came from the Chinese government’s plan to eliminate a significant percentage of foreign computers between now and 2022. And what doesn’t bode well for AMD is that China is requiring the components and software be made in China.

I’ll let Ramer’s own words sum up the problem:

If China is extending the prohibition to include server chips, 30% of the company’s revenue from China could be eliminated this year. Since AMD reportedly obtained 26% of its revenue from China in 2018, Beijing’s boycott could result in a sizable hit to AMD’s 2020 top line.

In the Short Term, There’s Gain to Be Made

But will short-term gain lead to long-term pain? For the first time, AMD stock is priced higher than that of Intel. That will only bring its valuation into question even more. But we are in a market where stocks will go up until they won’t. And I’ve been wrong more than I’ve been right about AMD stock, so I won’t argue that the short-term outlook for AMD is very, very good.

However, the semiconductor industry is notoriously cyclical. And AMD has a high valuation and relies on China for a good deal of its current revenue. I’m going to be interested to hear what the company says when they report earnings. But for now, the rally has just begun.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/amd-stock-ready-to-rally-despite-rich-premium/.

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