What Will It Take for Advanced Micro Devices to Get Out of Its Funk?

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Advanced Micro Devices (NASDAQ:AMD) crossed $50 on April 9, the first time it had done so after the novel coronavirus-induced correction in mid-March. Since then, AMD stock has stayed in a very tight range between $50 and $55. It’s up just less than 10% in the three months since. 

Image of the Advanced Micro Devices (AMD) logo outside of a corporate building

Source: Sundry Photography / Shutterstock.com

By comparison, Nvidia (NASDAQ:NVDA) is up 50% in the same period. 

What’s it going to take for AMD to get back in the game and out of its funk? Here are three possible ideas.

For AMD Stock, Time Heals All Wounds

There is no question that AMD stock has been stuck in the mud. However, it certainly couldn’t be the chipmaker’s most recent results dragging it down.

On April 28, almost three weeks after crossing $50, it reported 40% year-over-year sales growth, a 500 basis-point gross-margin bump, a 181% increase in non-GAAP operating income, and a 200% increase in earnings per share.

“We executed well in the first quarter, navigating the challenging environment to deliver 40 percent year-over-year revenue growth and significant gross margin expansion driven by our Ryzen and EPYC processors,”AMD chief executive Lisa Su said in its Q1 2020 press release. 

“While we expect some uncertainty in the near-term demand environment, our financial foundation is solid and our strong product portfolio positions us well across a diverse set of resilient end markets.”

The company even gave healthy second-quarter guidance of 21% revenue growth thanks to its EPYC processor and semi-custom sales. It did, however, lower full-year guidance from 29% at the midpoint to 25% due to Covid-19. 

InvestorPlace’s Chris Tyler recently made a technical argument about why AMD stock is poised to move higher. 

“Alongside Advanced Micro’s solid business prospects, today’s technical ennui is building a solid-looking platform for the stock to break out from,” Tyler wrote July 16.  

“Despite a couple failed bases this year, AMD remains well-positioned within a larger uptrend. At the end of day, those failures have produced an area of lateral congestion within the larger bullish channel that has impressively found support three times off its prior high set in 2000.”

The one thing I’ve found covering AMD since Lisa Su became CEO, is that its share price always seems to get going when investors least expect it. In a three-month slide, unless it reports terrible Q2 2020 results at the end of July, time will get it out of its funk.

Here Comes New Consoles

In May, I highlighted concerns about whether the new gaming consoles — PlayStation 5 and Xbox Series X — would be available in time for holiday 2020. One person covering the video game industry suggested the delay for launch could be as long as a year. That would not be good. 

However, while Sony (NYSE:SNE) hasn’t confirmed the exact date of the PS5 release, it has confirmed that it will happen sometime before the end of the year. A specific date could come as early as August. I’m going to assume Microsoft (NASDAQ:MSFT) is working on a similar schedule. 

When specific dates come out, I’m sure that will put some wind in Advanced Micro Devices’ sails. 

The Motley Fool recently reported that the installed base of gaming consoles at the end of 2019 was 260 million units. Of those, approximately 150 million were produced in 2015 or earlier. 

This means it’s quite likely that many of these gaming enthusiasts will upgrade to the new consoles, jump-starting AMD’s semi-custom business.

Free Cash Flow Continues to Grow

InvestorPlace’s Brett Kenwell commented on the company’s growing free cash flow recently: 

[Cash flow] has really started to shine. From 2016 through 2018, here are the free cash flow results: $13 million, $45 million and $129 million. In 2019 that figure accelerated up to $276 million and over the trailing 12 months stands at $431 million. This free cash flow growth alone is reason enough not to ignore AMD stock.

Based on an enterprise value of $64.6 billion, AMD’s current free cash flow yield is 0.66%. That might not seem so hot, but it’s an improvement over 2019. By AMD’s stock moving sideways over the past three months, investors are getting a better deal. 

If Lisa Su keeps this up, the company could generate a trailing 12-month free cash flow of more than $1 billion sometime late in fiscal 2020 or early 2021. 

While I continue to prefer Nvidia over AMD, I would have no problem owning both stocks. In fact, in recent years, they’ve tended to go hot and cold at different times, making it difficult to market time either stock.

In the end, I believe time will be what gets AMD stock out of its funk, and probably before Sony and Microsoft’s gaming consoles hit the stores. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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