Advanced Micro Devices (AMD, Financial) has rallied over the last few months. With the company scheduled to report earnings in the next few weeks, bulls and bears have locked horns and are expecting a significant movement in the stock price in either direction.
Although I was once bullish on AMD, I think bears will win the battle this time as bulls have run up its stock too high.
AMD’s weakness will boost NVIDIA’s sales
In 2015, AMD lost almost every battle against NVIDIA and Intel (INTC) in terms of both graphical processing unit (GPU) and central processing unit (CPU) markets. Furthermore, over the past few years, the company has been posting losses, which gradually led to the poor research and development budget. In 2015, the company spent only $946 million on R&D, a decline of $124 million from $1.07 billion spent in 2014. R&D spending is primarily used for GPU as well as CPU development, which is why AMD underperformed in the past.
NVIDIA (NVDA, Financial) has taken a massive lead over AMD in the case of R&D spending, with NVIDIA spening $1.33 billion on R&D previously. That figure is approximately 40% higher than AMD. Also, some of NVIDIA’s spending is used for enhancements of its growth business such as its self-driving car platform, but it can definitely be said that NVIDIA has considerably more resources to spend compared to AMD.
The considerable difference between R&D spending is the primary reason why efficiency of NVIDIA’s products is much better than AMD's. The company’s recently launched RX 480 definitely signifies an extensive enhancement related to its prior generation of products, but it draws more power than the rated power which can fry PCIe slots.
Performance per Watt is not so impressive
Both AMD and NVIDIA have made significant changes in their latest GPU architectures compared to their previous architectures. While the last generation was manufactured on a 28 nanometer process, Polaris is made on a 14 nanometer FinFET process. As per the company’s own marketing material, the Radeon RX 480 provides an up to 2.8x surge in performance per watt compared to the Radeon R9 200 series.
This displays a massive surge in efficiency, but it is not even better than NVIDIA’s prior generation GeForce GTX 970. Therefore, it is very clear that NVIDIA’s 16nm FinFET based Pascal GPUs entirely eliminate the RX 480 in terms of energy efficiency. Moreover, NVIDIA’s latest graphics card GTX 1060 will prove to be a major competitor for RX 480 going into earnings.
Conclusion
While AMD has performed very nicely over the last few months, I think the upside at these levels is pretty limited. Thus, I think investors should mitigate risk and sell AMD before earnings come out.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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