At its Oct. 7 opening price of nearly $86 per share, AMD had a market cap of nearly $100 billion on what should be sales of $7.6 billion in 2020. Intel, meanwhile, was worth about $52/share, $218 billion, on expected sales of $79 billion.
The price-to-sales relationship isn’t as extreme as in the Tesla-GM example (GM is worth a small fraction of its revenue) but the disparity is becoming harder to justify. This is especially true as Intel continues to bring one-quarter of its revenue to the net income line. Intel’s growth and profitability seem to match AMD’s.
In technology, momentum is everything. AMD chips continue to outpace those of Intel.
The high end of the chip market has long been occupied by gamers, and they love AMD. The company’s share in the Steam Hardware Survey continues to expand. It’s now 25%, meaning one-quarter of PC gamers are now running AMD chips.
Each new AMD announcement seems to pile pressure onto Intel. AMD plans an announcement Oct. 8 on what it calls its “Vermeer” family of processors. Tests before the announcement show these new chips are about 15% faster than the equivalent Intel processors. AMD’s line for 2021, combining graphics and processing on a single chip, are also said to be faster than what Intel is offering.
The EPYC design for server chips advanced by AMD is also undergoing rapid adoption by computer manufacturers. They are combining it with Nvidia (NASDAQ:NVDA) graphics chips for artificial intelligence applications.
The Nvidia Threat
While Intel may be in AMD’s rear-view mirror, Nvidia is far ahead of it. With expected 2020 revenue of $13 billion, that company is worth $348 billion, more than 25 times revenue.
Nvidia is ahead of AMD in graphics. Its Mellanox transport fabric is making inroads in cloud data centers. And its pending purchase of ARM Holdings could make it as powerful as Intel ever was. Some analysts are now predicting the death of the x86 architecture on which Intel’s success is based, replaced by ARM architectures from Nvidia. ARM is working on chips with 192 cores, designs that could put Intel permanently in the shade.
Nvidia and AMD have a long-standing “frenemy” relationship, often cooperating on sub-systems while competing fiercely in graphics. Once Nvidia closes on ARM, that could easily end because Nvidia will be able to supply its own processor needs.
It would be ironic if, after years of trailing Intel, AMD overcomes it only to find itself miles behind Nvidia. But that’s how things are looking.
The Bottom Line on AMD Stock
The last few years have seen a frenzy for chip stocks with valuations that go to infinity and beyond. Nvidia’s current valuation makes no sense to me, and I recently took some money out of it, putting it in Intel.
Right now, that looks like a mistake.
Fundamentals do matter, however. As good as Nvidia chips may be, the company isn’t worth 25 times revenue. No company is. I even find reasons to question AMD’s valuation, 13 times revenue, 169 times last year’s earnings. Both companies are also production limited, dependent on Taiwan Semiconductor (NYSE:TSM), their fabricator, for their growth. Even if Intel chips are second rate, they have manufacturing plants that can meet cloud supply and the low-cost production of good enough product.
But you don’t argue with the tape. Values are what they are, not what you’d wish them to be. AMD stock is up 90% in 2020, while Intel is down 12%. A speculator should avoid Intel, but an investor approaching retirement can have things both ways. Keep some money in Nvidia or AMD and keep an eye on it. Leave your Intel alone and take the dividends. Balance will come in time, and you’ll have profits either way.
On the date of publication, Dana Blankenhorn owned shares in NVDA and INTC.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.