Shares in Advanced Micro Devices, Inc. (NASDAQ:AMD) ran up in 2016 over speculation its new chips would be stars. They were. Now the stock is falling on speculation those stars will flame out. They won’t.
AMD shares have plummeted 30%, from over $14 per share to under $11 per share, since reporting earnings that should have been celebrated. The company had earnings of $71 million, 7 cents per share, on revenue of $1.643 billion for the quarter ending September 30. A year earlier it had posted a loss of $406 million, 50 cents per share, on revenue of $1.307 billion.
The stock fell because guidance for the December quarter saw revenue dropping 15% from its third quarter peak, but still 20% higher than a year earlier. This normal seasonal variation caused all sorts of speculation, but the business remains on-target.
Delivering on Promises
Most of the speculation concerned Bitcoin mining. AMD graphics cards are used in mining equipment. The lower fourth quarter estimate caused speculators to wonder if the mining bubble is bursting and, with it, AMD stock.
It’s not, and it wouldn’t matter if it did, because Bitcoin never was the heart of the AMD story. The heart of the story is in data centers, and in clouds, which are being upgraded to deal with artificial intelligence applications. It’s also in clients, in game machines and in self-driving cars, which need all the processing power they can get.
That story remains intact, as Luce Emerson wrote for us recently. AMD’s Total Addressable Market (TAM) now stands at over $60 billion. The company is also driving ahead in mobile devices. AMD is pressing Intel Corporation (NASDAQ:INTC) in these markets and will continue to press it.
Based solely on fundamentals, AMD is delivering on its promises and achieving its goals.
Choppy Markets
The problem is that the run-up in AMD stock was based on assumptions the company was never prepared to meet and on market growth that is now expected to be choppier than the speculators thought.
The same Morgan Stanley (NYSE:MS) report that showed cryptocurrency mining declining also saw video game console sales dropping. That would be bad for AMD, but many of its gaming chips go into fast PCs, not consoles. While demand for them is uncertain, it’s speculative to assume the worst just as it was speculative to assume the best.
Meanwhile, AMD keeps working its plan. Its Ryzen and Radeon chips are now being sold for laptops, a market Intel has long dominated.
Valuing AMD
By the end of 2017 AMD will have achieved sales of roughly $5.3 billion, at roughly break-even. It will have dropped its debt to roughly one-third of assets, still higher than Intel but not much higher. The lack of operating cash flow remains a worry, but AMD should still have superior top-line growth.
Even after its 2016 run-up AMD is worth only twice its estimated 2017 sales of $5.3 billion, while Intel is worth more than three-and-one-half times its estimated sales of about $60 billion.
In short AMD remains speculative, but its valuation is not out of line. It can grow its top-line faster than Intel, without increasing it dramatically. The power of smaller numbers continues to work in its favor, and if you believe that the chip market will stay strong, as most people do, it should be OK.
Our Vince Martin is right. You’re not going to get 2016’s stock gains again, but you can still make money on a healthy chip stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
