Advanced Micro Devices (NASDAQ:AMD) is Wall Street’s newest darling.

At the start of 2016, this was a $2 stock. On Aug. 28, AMD stock traded as high as $25 per share.

I was high on AMD CEO Dr. Lisa Su when she took over in 2014. I called AMD stock a buy and have not been disappointed.

But never fall in love with a stock. Always be ready to reevaluate.

AMD’s rise illustrates the shift in power from chip manufacturers to chip designers. All the best chip companies are now “fab-less,” from Nvidia (NASDAQ:NVDA) to Qualcomm (NASDAQ:QCOM) to AMD.

Moore’s Law is the idea that chip density can double every year or two, at no increase in cost. It was first promulgated by Gordon Moore, later co-founder of Intel, in Electronics Magazine. Moore’s Law lets chip designers get more value from their designs every year, once they go into production.

But there’s a corollary to Moore’s Law, which I call Moore’s Second Law. That is, as chip densities increase and as the distance between circuit lines, measured in nanometers (nm), continues to go down, the cost of the machines that make them also grows exponentially.

This is why AMD is switching foundries, from privately held Global Foundries to Taiwan Semiconductor (NYSE:TSM). Global has decided not to develop the 7 nm process required for AMD’s latest designs. 

A Possible Tipping Point

I think this means a tipping point has been reached.

Global Foundries claims there is no demand for 7 nm product right now, but the fact is it’s just very hard, and very expensive, to make chips with lines so close together. Moore’s Law, traditionally defined in terms of circuit lines on silicon, is hitting a wall. 

Intel (NASDAQ:INTC) says it won’t even have 10 nm production until next year. The company is hiring AMD executives as fast as it can. 

AMD, in short, has no choice when it comes to foundries. TSM, which is in what China’s government calls “Greater China,” is the only company that can make AMD’s next chips to its specifications. China, in other words, has a near-term monopoly on 7 nm technology.

Monopolists don’t have to compete on price. Monopolists can get any price they want. Do you think this has occurred to the good people at Taiwan Semiconductor?

I think it has.

Wall Street Continues to Miss It

This news has not, however, gotten through to the good people on Wall Street. 

Analysts are pounding the table for AMD. Their price targets can’t seem to keep up with their buy orders. The price-to-earnings ratio of AMD stock is now nearly double that of Nvidia, but price no longer seems to matter. 

After all, they think, if Intel chips at 14 nm have to compete directly with AMD chips at 7 nm, doesn’t that give AMD the premium price? 

Meanwhile, the price of shares in companies whose equipment makes chips, like Applied Materials (NASDAQ:AMAT), are rolling over. 

Bottom Line on AMD Stock

Business reporters are saying that AMD is winning the chip war over Intel, but to me, something’s not right. AMD has a design for 7 nm chips, but only Taiwan Semiconductor can make them. Doesn’t that mean Taiwan Semiconductor is winning the war?

Taiwan Semiconductor currently has a market cap of $217 billion. That’s just $7 billion less than Intel. Its price-to-earnings ratio is a reasonable 19.5, and its dividend yields 3.3% at its Aug. 29 opening price of about $43.70 per share. Intel’s dividend yield is lower, at 2.5%.

Considering Moore’s Second Law, and Taiwan Semiconductor’s lead on Intel in 7 nm technology, doesn’t that make TSM, rather than AMD, the name to play?

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 story.