- Rising interest rates have hurt the investment case for AMD (AMD) stock
- Technology will continue to cut costs and erode inflation
- Investors with a three-year time horizon can get a bargain price on AMD now
Advanced Micro Devices (NASDAQ:AMD) stock has fallen hard in 2022, thanks to rising interest rates and inflation.
Shares that cost $145 each at the start of 2022 opened May 2 at $85. When you can get 3% interest on a government bond, or 5% on a mortgage bond, why buy earnings that don’t generate dividends?
I was caught offside myself, “buying the dip” at $100 and missing lower prices. AMD is still up 4% from a year ago, but that price may also be taken out as the bear market continues.
What’s important to know is that there is nothing wrong with the company or its investment thesis. That doesn’t mean it can’t go down after earnings. It can. But analysts are expecting earnings of 90 cents/share after trading ends May 3, on revenue of $5.5 billion. Keep that up for a year and it’s a price to earnings ratio of 24.
What are you waiting for?
| AMD | Advanced Micro Devices | $85.83 |
Chip Shortages
The big question around AMD stock isn’t about the last quarter earnings. It’s about when the current chip shortage may end, imperiling future earnings.
Intel (NASDAQ:INTC) sees it stretching into 2024. That may be a political statement. Intel CEO Pat Gelsinger wants the CHIPS Act passed, with sweet, sweet stimulus cash that will let the company ramp up production.
A Truist (NYSE:TFC) analyst is already seeing slowing demand, cutting price targets on AMD and other chip makers.
AMD CEO Lisa Su believes shortages should ease later this year. But it’s important to note what we’re talking about. Supply and demand coming into balance is not a bad thing, either for AMD or the economy. She describes that as things are getting “a little bit better.”
Chips aren’t oil. When oil supply catches up with demand, prices can drop fast, because demand is very inflexible. With semiconductors, demand is far more flexible. Rising supplies mean new designs based on cheaper chips can go into production.
The Next Acts
AMD is beating Intel in microprocessors for PCs and cloud data centers. It’s behind Nvidia (NASDAQ:NVDA) in graphics processors for game machines and artificial intelligence applications.
That’s the conventional wisdom. But gamers who’ve looked at the next generation of chips think AMD is narrowing the gap on Nvidia and could even overtake it in gaming.
The other hot new market for AMD is the cloud. There, its acquisition of Pensando, a distributed network platform, is meaningful. As Louis Navellier and his team wrote recently, AMD’s data center sales doubled last year, and the data center market should reach $288 billion in 2027. AMD’s total revenue last year was about $16.4 billion.
Then there’s what I’ve called the Machine Internet. This involves chips that include software and are embedded in just about everything. We talk about cars, but we should also talk about factories, about traffic systems, and about buildings and health devices.
These chips will respond automatically to sensor data, alerting factories when machines go down, or changing traffic light timing when traffic builds. They need to be pre-programmed. That’s where AMD’s acquisition of Xilinx comes in. Xilinx sold chips that included the software needed to run sensor-based applications. That technology can now be embedded in AMD silicon.
The Bottom Line
The end of the chip shortage heralds a new era, where semiconductor chips aren’t just in devices you hold in your hand, or load into cloud data centers. They herald an era where the intelligence of software can be all around us.
AMD is ready to lead that era. That’s why I bought the stock in the first place. The applications, and their resulting demand, aren’t being seen by analysts yet. But give it time. If you believe in the future, you can believe in AMD.
On the date of publication, Dana Blankenhorn held long positions in AMD, INTC and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
