The best performing stock of the S&P 500 for the last 2 years, this ‘number 2’ company has its sights set on the top spot; is AMD a good buy?
For as long as anyone can remember, Advanced Micro Devices (NASDAQ: AMD) has always played second fiddle to Intel Corporation in the world of microchips and semiconductors. That is until Q2 of 2020, wherein AMD started running neck-in-neck with Intel for desktop CPU market share (48.8% for AMD versus 51.2% for Intel) and inching closer to the overall CPU market share at 35.1% versus Intel’s 64.9%. Both companies are considered pandemic-resistant as they contribute to cloud architecture, an essential service during lockdown for both work and education, but what about after? Can AMD claim the top position and is it a good investment?
The bull case for AMD
Intel announced recently that its 7 nanometer (the lower the number, the more efficient and faster) transistors will be delayed until 2022 or 2023, giving rival AMD an even bigger boost in stock price than it was already seeing; as of August 14, it’s up over 65% for the year. AMD has already developed its 7nm Ryzen chip and is working on a 5nm model, expected to launch in 2021. Aside from personal CPU market growth, the company is steadily chipping away at the data center market with its 7 nm EPYC Rome chips, which outperformed rival Intel’s chips in most benchmark tests and efficiency.
In fact, the total cost of ownership (TCO) of the chip is 25%-50% better than Intel’s counterpart, leading to adoption by huge names like Amazon Web Services, IBM Cloud, Microsoft Azure, Google Cloud, and Twitter. With the introduction of its Milan chips later this year, AMD is well on its way to a 31% data center market share by 2023, according to analysts. The company is also expecting a revenue boost from sales of Sony’s PS5 and Microsoft’s XBOX Series X gaming consoles this holiday season for which AMD is furbishing not only CPUs but GPUs as well, beating out competitors Intel and Nvidia (NASDAQ: NVDA). Due to all this, its market share in the GPU sector is 31% and growing, thanks to a lower price-point and better performing chip.
The bear case for AMD
Yes, the pandemic has driven business for the company, which did not forgo issuing a year-long outlook for 2020 like most companies did, and yes gaming console sales are expected to be very good this year, again boosted by COVID-19; but what about after? Competition is the biggest threat to AMD and it not only exists with Nvidia but is looming in the near future as Intel can catch up in the coming years; additionally, both Intel and Nvidia have more cash in their coffers for R&D. Also, with Apple releasing its first Arm chip Mac in 2021, the company could face 7nm production bottlenecks from its manufacturer Taiwan Semiconductor Manufacturing Company, also used by Apple, limiting its competitive strength against Intel and Nvidia.
Intel co-designs many laptops and has strong relationships with their manufacturers, often offering to subsidize R&D to help maximize performance and battery life; an area AMD doesn’t have much of a footprint in. Additionally, Intel has proprietary technology like Thunderbolt 4, for which AMD needs to pay to use. On the financial side, insider buying has been non-existent at AMD in the last year, signaling that the stock price may be too high, which is unsurprising considering that it has surged over 4300% in the last five years.
So, should I buy AMD stock?
AMD’s growth has been spectacular ever since 2015, not only with its stellar stock-price surge but also a 68% growth in revenue; and with its constant development of better performing and less expensive chips way ahead of Intel’s timeline, you can expect the company to enjoy continued success. In fact, analysts predict more than a 20% annual revenue growth until 2024.
It does not, as of yet.
Dr. Lisa Su, since October, 2014.
Experts believe in November, in time for the holiday shopping season.
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