3 Reasons Why Advanced Micro Devices, Inc. (AMD) Has the Competitive Ege
Semiconductor giant Advanced Micro Devices, Inc. (NASDAQ:AMD) has a volatile stock history. So it is no surprise that investors are cautious about the outcome of this latest price spike. Shares are now trading at around $13, far off the peaks of $92 (in 2000) and $40 (2006), but still considerably higher than the under -$5 seen for much of the last few years. According to Goldman Sachs’ Toshiya Hari enough is enough. He says the bar is now “very high” and is forecasting that rivals Nvidia and Intel could introduce pricing concessions later this year to compete with AMD’s new product line which includes the Ryzen CPU, Naples CPU and Vega GPU.
However, AMD’s power should not be underestimated, the stock can stay competitive even in the face of larger competitors. Here’s why:
- Staying Ahead of Competitors – AMD can lower prices while maintaining net profit margin expansion should competition heat up. AMD only has to reduce the RX 580 by 7% to stay compatible with Nvidia’s $229 GTX 1060. AMD should be able to bring prices down further without too much trouble, unlike Nvidia. This is because AMD has an impressive record of cost efficiency while keeping a 35% to 40% gross margin target on the business. In contrast Nvidia is operating with a gross margin target of 55%-60%. This gives AMD greater flexibility because it has less pressure to sustain higher margins to match shareholder expectations. Indeed, it is incredibly unrealistic to expect that larger companies like Nvidia or Intel could match AMD’s price structure any time soon given that they have to maintain gross/operating margins as well as current levels of R&D.
- 7 Nanometer Process Node – currently commercial production of 7nm chips is at a development stage. These nodes are expected to be the next big long-lived node- and so the race is on to produce the first commercial node. AMD has a shot at being one of the first companies, and in doing so will have a serious competitive advantage over both Nvidia and Intel. What gives AMD this advantage? The largest shareholder of AMD is Mubadala Development with over $2 billion invested in the stock. Now Mubadala also owns semiconductor manufacturer GlobalFoundries. Through a deal with IBM back in 2015, GlobalFoundries has access to IBM’s 16,000 chip patents, which- given that IBM was the first company to create the world’s first 7 nm test chip in September 2015 using extreme ultraviolet (EUV) lithography- includes the patent for the 7 nm mode. In fact, GlobalFoundries has already unleased a very confident roadmap which suggests that the first 7nm could available in the second half of 2018 vs Intel’s proposed date of 2019.
- Potential Collaboration with IBM – The GlobalFoundries link raises the possibility of a collaboration between AMD and IBM further down the line- perhaps involving power8, IBM’s most powerful microprocessor yet. IBM is already offering power8 chips to system builders in the merchant semiconductor market and is even licensing the architecture to other processor vendors in the hope of reducing Intel’s 90% plus market share of the server market.
From financial accountability engine TipRanks we can see that the stock has a Moderate Buy analyst consensus rating. In other words, in the last three months analysts have published 8 buy, 8 hold and 2 sell ratings on the stock. Due to the spike in the share price, the average analyst price target of $11.88 now stands at a -8.6% downside from the current share price. However, if we refine the average analyst price target to only price targets from the best-performing analysts the downside shrinks to just -2.23%.
Disclaimer: The author has no positions in the stock mentioned. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.