It’s been another standout year for Advanced Micro Devices (NASDAQ:AMD). Note that AMD stock has gone from $48 to $94 and the market capitalization is at $112 billion. It really is hard to believe that the company was on the verge of bankruptcy six years ago. So yes, AMD stands as one of the greatest tech turnaround ever.
The CEO who has accomplished this is Lisa Su – and she certainly deserves much more attention. When she came on board the company, she was smart to outsource production to Taiwan Semiconductor Manufacturing (NYSE:TSM), cut costs, bolster the balance sheet and to rethink the product development roadmap.
She also had the right mix of technical and business experience to bring AMD back from the brink. Before joining the company, she served as an executive at companies like Texas Instruments (NYSE:TXN), International Business Machines (NYSE:IBM) and NXP Semiconductor (NASDAQ:NXPI). As for her education, she received a Ph.D. from MIT and has published more than 40 technical papers.
Now I’ve been bullish on AMD stock for quite some time. The company is targeting a variety of major growth markets like gaming, cloud computing and artificial intelligence.
But then again, there are still risks to consider. For example, the company recently agreed to a $35 billion merger with Xilinx (NASDAQ:XLNX). While there are good synergies, the deal will be complex and require disciplined integration.
Yet there are some other risks as well. So let’s take a look.
The Threats
AMD has been around since the late 1960s. But during much of this time, the company has been a marginal player in the computer processing unit space. Of course, the dominant rival was Intel (NASDAQ:INTC).
But interestingly enough, for the past few years, Intel was beset by quality issues, delays and drama in the executive suite. And AMD did a pretty good job on capitalizing on this. This has especially been the case in the data center segment, which is quite lucrative.
Although, Intel is starting to get things back on track. The company certainly has significant resources, technical talent and marketing capabilities. So in the next few years, AMD will likely feel much more pressure from Intel. It seems inevitable.
In the meantime, there will emerge another threat – that is, the mega tech operators like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB). They are actually building their own advanced chipsets. Often these are focused on unique use cases like AI and machine learning.
This is not to imply that these companies will sell the chipsets. But the tech companies can still monetize this technology by providing access via cloud platforms on a usage basis.
We’ve already have seen a glimpse of the potential impact on this emerging trend. On reports that Microsoft was developing its own CPUs, Intel shares got hit by about 10%.
Bottom Line on AMD Stock
There are also risks for AMD stock in terms of its business model. For example, the outsourcing of production poses issues. Even if demand continues to be strong, there may ultimately be capacity problems as other chip companies and mega tech operators buy up supplies.
So yes, AMD stock is far from a guarantee. However, I do not see a sudden downturn either.
The issues for the company will likely not become a problem until the next few years, such as with the impact from the mega tech operators. But I also think it will get tough to churn out growth on the top line.
Besides, AMD stock is far from cheap, with the shares trading at 51 times forward earnings.
In other words, it’s probably a good idea to be more cautious on the shares for now.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
