2020 has been a miserable year for almost everybody. But it has been pretty good for Advanced Micro Devices (NASDAQ:AMD). AMD stock has rallied 51% so far in 2020.
It’s not just a matter of the AMD stock price, either. The news flow around the company generally has been good. Fourth quarter earnings handily beat Wall Street expectations. The Q1 report in late April looked solid. As I detailed in March, the company’s outlook delivered at its Financial Day Analyst, promised long-term growth and significant upside for the stock.
But the best piece of news came on Thursday — and wasn’t even AMD’s doing. Rival Intel (NASDAQ:INTC) has stumbled once again. The news sent INTC stock falling 16%, while AMD shares rallied by nearly the same amount.
With all that good news, AMD earnings on Tuesday afternoon would seem to be an opportunity to drive even more optimism. But with a pandemic still raging and the tech sector back at all-time highs, the report itself seems like a potential short-term stumbling block, even as the long-term case looks strengthened.
Intel Flops Again
The core reason that AMD stock has gone from under $2 in early 2016 to nearly $70 at the moment is that the story surrounding the stock has fundamentally changed.
After all, four-plus years ago, AMD was in trouble. Bankruptcy was a legitimate possibility, thanks to the combination of ongoing losses and a leveraged balance sheet. That aside, AMD was a distant rival to Intel in a personal computer market that looked headed for long-term declines.
The story now, of course, is very different. Thanks to launches like Ryzen CPUs (central processing units) and the Vega GPU (graphics processing unit) line, AMD charged back into contention with Intel. But it also helped that Intel opened the door for its smaller competitor.
Intel has been dreadful at product development. Last year, Dana Blankenhorn cataloged the many mistakes the company has made. Notably, the company was four years late in developing its 10nm manufacturing process.
And now Intel is blowing up at 7nm. It announced with last week’s earnings that it wouldn’t get to 7nm until 2022. Given the company’s history, 2023 may be more realistic.
AMD, thanks to manufacturing partner Taiwan Semiconductor (NYSE:TSM), is already there. And so AMD will have an enormous competitive advantage going forward.
That’s why AMD gained on Friday while INTC plunged. Even TSM stock got a nearly 10% bounce. The question for AMD the last few years was whether it really could catch Intel. Now the question might be reversed: it’s Intel who looks like the distant rival.
Short-Term Concern for AMD Stock
The concern for AMD stock, however, is whether the good news is priced in. Friday’s rally alone added more than $10 billion to the company’s market capitalization.
And it’s not as if AMD stock was cheap before the rally. Shares were still trading at almost 40x the 2021 consensus earnings per share estimate. That’s a huge multiple for a chip name, nearly as high as that assigned Nvidia (NASDAQ:NVDA).
Indeed, while recommending the stock near March lows, I estimated that the bullish Financial Analyst Day targets suggested a path to $70 over five years. Obviously, we’re already there.
This is not to say that AMD stock is a short target, or even overvalued. There’s still a case for long-term upside (more on this in a moment).
But with earnings looming after the close on Tuesday, there’s a serious question to ask: what can AMD really deliver with the report? For the stock to rally from here, it needs to attract new buyers.
Those new buyers have to see Thursday’s news as not enough to buy, yet see something in Tuesday’s earnings report to change their mind. That seems difficult.
After all, Intel’s miss was potentially transformative for the industry. Bear in mind that Intel lost over $40 billion in market value on Friday. That’s huge news.
It’s hard to see how even a blowout earnings report can compare. And with the likes of Tesla (NASDAQ:TSLA) and Netflix (NASDAQ:NFLX) fading from all-time highs after strong results of their own, recent history suggests AMD stock may see softness this week.
Buy the Dip
We’ve already seen that kind of trading from AMD itself. Shares slid about 6% after the strong Q4 report. But that dip, like every other pullback since early 2016, proved to be a buying opportunity. And I expect a post-earnings drop this week, if it comes, will prove the same.
After all, it’s worth reconsidering Friday’s moves in both AMD and INTC. Again, Intel lost $40 billion in market value. AMD gained just $10 billion.
That’s despite the fact that AMD seems like the biggest winner from Intel’s troubles. So while $70 seemed like a reasonable long-term target a few months ago, it’s likely conservative in the context of the new environment.
In other words, the impressive rally in AMD stock can continue. I just wouldn’t necessarily expect it to continue this week.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
