The 100% return on Advanced Micro Devices (NASDAQ:AMD) in 2020 is nothing short of breathtaking. The semiconductor company beat the Nasdaq’s nearly 50% return in that time. In the last half of the year, though, AMD stock is appearing to struggle.
AMD found support in the $75 – $80 range, at around its 50-day moving average. Conversely, the stock broke out in the last month to the $90 – $97.98 range.
At this price, the stock is valued at a still-expensive forward price-to-earnings ratio of 50 times. Its competitor, Intel (NASDAQ:INTC) failed to refresh its lineup of next-generation computer chips in the last year.
Might investors continue to expect Intel to stumble on the personal computer and server markets?
Intel Shake-Out Will Move AMD Stock
Hedge Fund activist Dan Loeb send a letter to Intel, which Reuters obtained. He urged the company to explore strategic alternatives. Having built a nearly $1 billion holding in Intel shares, Loeb called for the company to outsource more of its manufacturing capacity. It also wanted it to slim down. For example, that would put Intel’s Altera acquisition for $16.7 billion on the selling block.
Divesting businesses not related to the PC CPU and data center market would put pressure on AMD. The company is enjoying market share growth in the server market. Thanks to its EPYC server product, customers benefit from higher performance at lower costs.
By comparison, Intel relied too long on the Xeon processor. Its latest processor is the E7-8890 v4. This has a 60MB cache, 24 cores, 48 threads, and a 3.40 GHz maximum turbo frequency.
In the PC market, Intel’s integrated graphics offered with its CPU gives it an edge on convenience and pricing. Customers could opt from AMD’s 2400G or 3400G. But since the other AMD chips do not have integrated graphics, corporations may still prefer Intel’s desktop CPUs.
AMD for Gaming
Hardware and game review sites favor AMD’s Ryzen CPU. For example, PC Gamer rated Ryzen 9 5900X as the best CPU for gaming right now. It also rated Ryzen 5 5600X and Ryzen 7 5800X in the second and fourth rank, respectively.
In the notebook space, PC makers started to list AMD-powered solutions on the main page.
Risks to AMD
Rumors that Microsoft (NASDAQ:MSFT) is working on in-house processors for its servers and PC are a threat to AMD. That would bring another goliath to the chip market. This would slow AMD’s market share growth and pressure its profit margins.
Technology from Arm Ltd. is proven to offer excellent performance and power-saving features. This chip would suit Microsoft’s hot-growing Surface PCs. The move would follow Apple’s (NASDAQ:AAPL) decision to power its computers with an in-house M1 chip.
For now, Wall Street analysts are not concerned about Microsoft or Apple going on their own. The average price target is around $95.00, and 13 of the 20 analysts rate AMD stock as a “buy.”
The ratings as shown above suggest that investors need not worry about AMD’s prospects. The stock has a perfect 100/100 growth rating. The company is efficiently run and has a healthy balance sheet, as the financial strength of 76/100 indicates. Still, the 37/100 value score is a data point to watch out for.
AMD will likely shine again this year. Its server and desktop business is thriving. The stay-at-home and work-from-home trends show no sign of abating.
A Covid-19 vaccine will encourage workers to return to work physically. That is still many months away. Until then, PC sales will increase throughout this year and next.
AMD is a stock to buy.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.