Advanced Micro Devices (AMD) has been one of the hottest stocks this past year. If you had bought AMD stock at the 52-week low of $9.04, you would have realized a percent gain of over 240%. Even with this incredible increase, 26 of 31 analysts recommend AMD as a hold or buy with only five labeling it underperform or sell.
This massive spike in stock price is oddly not uncommon to AMD. Similar spikes have occurred in late 1999, when it reached a peak of $43 only to fall back to below $4.80 in October 2002 and then spike again to over $40 in early 2006. It once again fell to below $2.20 in December of 2008. This represents an astonishing swing of over 90% in the stock price in only a matter of a few years. Interestingly, despite these massive swings in price, for the last eight years Intel Corp. (INTC) has been both a safer investment as well as a better performer.
There are a few reasons for this recent switch in stock performance with Intel losing ground and AMD taking the lead.
First, AMD is capitalizing off of stumbles made by Intel, which has had difficulty launching its line of new 10nm architecture CPUs. Mass manufacturing will be delayed from the second half of 2018 to 2019 as a result of yield issues. There are reports that it is likely that client processors won’t launch until the holiday season of 2019.
This shortage of 10nm CPUs has created a larger demand for their 14nm CPU creating yet another shortage problem. This positions AMD very well, and it is poised to launch its 7nm CPUs (code-named “Rome”), also due to launch in 2019. This timing allows AMD to continue to compete head to head with Intel and position themselves to steal server market share from Intel (discussed below). While it is an over simplification to strictly compare 10mn to 7nm, it is widely expected that Intel’s 10nm will be comparable to AMD’s 7nm chips.
Another stumble of Intel that AMD is capitalizing on is the recent unexpected departure of CEO Brian Krzanich. This departure has sparked concerns over the necessary leadership to overcome the 10nm CPU production delays noted above. Bob Swan is currently serving as interim CEO after being appointed by the board.
These stumbles have helped AMD perform very well. It posted its highest quarterly net income in seven yearsÂ in the second quarter of 2018.
One segment of growth for AMD worth noting was its EE&SC (Enterprise, Embedded and Semi-Custom) segment, reporting $670 million in revenue (38% of total) which was an increase of 37% year over year and 26% sequentially. This segment drive was primarily due to console gaming (AMD is the processor supplied for Zbox One and PlayStation 4) as well as AMD’s chip Epyc, which targets the server processor market. Revenue from Epyc chips has risen more than 50% in the second quarter of 2018.
This server market has historically been Intel’s market stronghold and AMD’s penetration into this market does have Intel concerned. For example, former CEO Brian Krzanich has indicated that “it was Intel’s job to not let AMD capture 15-20% market share” in the server space. More generally speaking, it has been reported that AMD may be able to control 30% of the entire processor market in the near future.
Whether or not it is possible for Intel to fend off AMD from entering the server space long term is still unknown. While AMD has historically been able to compete on costs, there are other variables to consider such as “server uptime, reliability and end-user support,” which has historically been a strength of Intel.
White at the current moment, the recent surge in stock price makes AMD a risky investment, it can be argued that long term AMD is better positioned than it has been for quite a long time. That said, the long-term stability and market presence of Intel should not be underestimated. The shortages Intel is experiencing that lend to AMD's current advantage will not last forever, and it is likely that Intel will regain its footing, continue to increase its revenues and have its stock price recover in the next year or so.
As can be seen below, historically Intel has performed very well, consistently improving revenues, increasing its dividend and in the last decade consistently having its stock price post impressive gains. Intel is by no means down for the count.
Disclosure: I do not have positions in the stocks mentioned.