I have written quite a bit about Advanced Micro Devices (NASDAQ:AMD) in the past. (Past articles available here.) Naturally, having written nothing on the stock in the past half year, I was asked whether my previous thoughts still held.
I believe at the moment the major developments with this company are two-fold. First is Apple (AAPL) moving away from its reliance on Intel (INTC) and AMD’s chips. The second is AMD’s recent superiority over Intel in terms of performance.
The Apple issue is clearly beneficial to Apple but does more damage to Intel than to AMD. Producing its own chips removes from Apple the nibbling away of profit margins due to no longer having to pay for externally manufactured chips. In addition, the transition to ARM processors makes sense for the company’s core customer base.
ARM chips will reduce performance of the new MacBooks relative to x86 in exchange for increased power and reduced size. While Apple does have its share of power users, the majority of its base consists of light users. For them, thinner MacBooks that have longer battery lives are likely more desirable than MacBooks with processing power that will never see actual use.
In the Intel vs. AMD war, only recently has AMD come out ahead. It is showing newfound abilities in chip design and actually marketing the actualized performance increases from said chip design to where AMD is the clear winner in the laptop and gaming console industries. Combining this fact with Apple’s migration away from its reliance on external chip manufacturers, we now have an environment where competition will be more extreme outside the Apple market: Non-Apple users become the only market for which these two chip companies can compete, meaning that Intel winning a contract with Apple to save its skin is no longer an option for the company.
Thus, Apple’s adaption of ARM is likely to be beneficial – not detrimental – for AMD. AMD now has a real chance pushing Intel out of the market. In addition, at AMD’s current rate of progress, it could quite possibly win over those Apple power users.
In short, Apple’s recent intent to go all in with ARM makes AMD’s game almost purely one of performance. If the non-Apple market is the superior market for performance and if AMD is the superior chip manufacturer in the non-Apple market, which is currently the case, then AMD need only focus on maintaining itself as the performance leader to win bigly from what can only be described as a perfect storm for AMD superiority.
AMD might even be able to return to Apple laptops (e.g., MacBook pros for power users) once it establishes itself as the clear performance leader. Intel will probably not have such an opportunity in the near future, as Apple can already create chips that outperform Intel’s in terms of performance per power. From a perspective of company size, this is quite impressive, as AMD is much smaller than Intel, yet able to consistently out-design Intel.
As an ex-marketer, I like both Apple and AMD’s recent actions. They seem focused on their respective markets. Apple wants to design chips that allow for more comfort and convenience (longer battery life and more compact laptops), while AMD is focused on providing the best performance (top-of-the-line GPUs for gaming and CPUs for laptops).
Look at AMD’s success with the Ryzen 4800H. The company’s ability to gain superiority over a larger, better funded, more established Intel has strong implications for both of these companies’ futures. Perhaps, AMD becomes larger than Intel and can fund its own dedicated manufacturing teams (AMD is currently fabless).
AMD is already playing big, having won the contracts with both Sony (SNE) and Microsoft (MSFT) to produce CPUs and GPUs (branded as APUs, as AMD is combining both the CPU and GPU on a single integrated circuit) for PlayStation 5 and the Xbox Series X, respectively. Intel, in the meantime, is losing its grip on the market. Apple’s decision to create its own chips might in fact be a response to its previous reliance on Intel chips, which were underperforming relative to AMD – the lack of real performance improvements in Apple’s latest MacBooks might have been taken as an opportunity to step away from relying on Intel and external designers as a whole and to further solidify its consolidation of creating laptops specifically for its core audience.
In any case, Apple’s recent decision is one of the biggest in the chip markets and likely is beneficial for both Apple and AMD. The decision is certainly a headwind for Intel. In conclusion, in response to the question about AMD, I am very pro-AMD.
However, I am not recommending a buy at this point. And it’s not AMD’s fault – the market’s tech rally has pushed valuations to too high. While AMD is certainly worth the $55.88 per share (at the time of writing, July 12th) when you consider its future prospects, the tech market will almost certainly fall back, allowing you to buy at lower prices.
I believe the AMD stock direction is upward, but not without a significant pullback in the tech market dragging it down to better buying opportunities. Likewise, those looking to take profit on AMD needn’t panic sell, as AMD will certainly be higher than $55.88 in the near future. I think AMD’s price is around where it should be but in a market that’s way too high, and thus, I am neutral in regard to AMD’s current valuation.
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Disclosure: I am/we are short MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.