38680628 - red bearish key on keyboard
Analysts and investors alike are asking if the time is ripe to dump Advanced Micro Devices, Inc. (NASDAQ:AMD) shares or hold out for a better day. It is no secret that the flailing stock has struggled to compete in recent years, as the microprocessor market grows ever more competitive and crowded. While the tech giant’s stock has pulled back from the brink over the last 18 months rising from $2.36 to its current price level of $13.19, the question remains: Can AMD keep its momentum going? The short answer: No.
Let’s explore why it’s time to short AMD’s stock:
Intel Continues to Dominate Micro Processing
There is no doubt that Intel stands as the king of micro processing with ample budget for R&D to the tune of around $13.5 billion in fiscal year 2016 compared to AMD’s $1 billion budget. In short, Intel can continue to innovate and release products to the market at a much faster pace than AMD can. There are those who might point to AMD’s cutthroat-worthy eight-core CPU processor to suggest the feats AMD can pull off on a limited R&D budget. Yet, when looking beneath the surface, the impressiveness of the great CPU processor evaporates. It turns out that AMD simply implemented hyperthreading, which Intel already utilized for years.
Moreover, due to Intel’s size and scope of its operation, the company by and large has set the tone for the industry along with various benchmarks for PC manufacturers and microprocessor developers for high computer system standards. Furthermore, the company’s ability to provide rebates, pricing actions, product bundling, exclusivity payments, and product arrangements all limit the ability of other market players like AMD to compete.
Even Nvidia Is Out of AMD’s League
Nvidia notably has a more comparable R&D budget to AMD- one that stands around $1.4 billion. AMD’s chip making rival has served up the Volta-based Tesla V100 GPU accelerator, which is quite a powerhouse thanks to better architecture. Whereas Nvidia opted to string together CUDA and Tensor cores, AMD sprang for an open-source RCM software platform. In a match of CUDA vs. ROCm, CUDA takes the tech cake, as its tools are superior, from a debugger to profiler to libraries. This makes it all the more difficult for AMD’s MI series Radeon Instinct line of GPUs to seriously compete, as its technology has not advanced as quickly. It is also telling that Nvidia has a leg up in the automotive industry, an advantage in a future field that is rising in importance of AI. Scoring a key collaboration with Toyota, which could make the semi-conductor competitor close to $2 billion in just two years, AMD is merely trying to play catch up with its own hardware releases.
The Issue with AMD Products
To put in on the table, AMD has not really developed anything new. The company seems to be in a perpetual state of lagging behind the market, which is reflected in the chip maker’s strategy to release old products in new packaging. As technology continues to advance at a rapid-fire pace, tweaking CPUs and GPUs is simply not going to cut it. Studies have shown that AMD’s Data Center, which focuses on machine intelligence (MI) and artificial intelligence (AI), including EPYC x86 architecture-based processors and Radeon Instinct family of server accelerator products will only provide incremental growth through 2020.
Can AMD Ever Compete with Intel?
AMD is no longer dead in the water quite like the chip maker’s situation looked just a couple of years ago. The company’s operating income has broken even; debt-to-equity has normalized; AMD’s CEO Lisa Su knows how to navigate the world of the interweb to her advantage (using her online reputation to garner popularity among the public); and the chip maker has a slew of fresh products, including tailor-made chip solutions for Playstations that are seemingly weighing in its favor. However, with all that said, the stock lacks compelling value in the long-term.
Even if the chip maker is in the midst of a turnaround, and even if that comeback yields some encouraging share growth, the company would still trail Intel by a long shot. Consider that consensus is aiming for the chip maker to post $5.7 billion in sales by the close of this year, which takes under account an 18% rise in sales this year as well as 12% growth when looking at the next year.
Assuming AMD is capable of boosting sales an extra 14% pop, the company could theoretically yield $6.5 billion in sales, indicating a 50% step up from the company’s financial situation at the close of 2016. Yet, in this profitable scenario, even the chip maker can repeat its second-quarter feat where it brought a 6.7% net margin to the table; for the sake of argument, angling for a 10% margin, this is nonetheless still approximately only one half of rival Intel’s net margin.
In short, the stock is overrated when assessing its long history of underperforming the market and lack of originality in the microprocessor market- especially in an environment where giants Nvidia and Intel are attacking the chip maker arena with a vengeance to rule the leaderboard. While a decent profit can still be made in the trade, a warning hangs in the air of an end to AMD’s bullish comeback; so well while gains are still on the side of the investor, it appears to be an opportune time to sell this chip maker.