Advanced Micro Devices, Inc. (AMD) has been experiencing headwind from the declining PC market and not benefiting much from the PC gaming market unlike Nvidia (NVDA) thus experiencing a steady revenue decline. Also, console gaming is predicted to decline and hence AMD might have a lot to lose if it does not revise its strategy with regards to the gaming market. However, AMD could benefit from its more recent APU line, which would help it diversify into multiple markets.
AMD is a Sunnyvale, California based American multinational semiconductor company that produces computer processors for consumer and commercial markets powering both commercial and consumer computing devices such as laptops, workstations and supercomputers, and gaming and embedded systems, as well as digital devices such as tablets and smartphones and cloud servers.
The chief products of AMD include microprocessors, motherboard chipsets, embedded processors, and graphic processors. The company is famous for its computer processors, including the AMD Opteron X-series processor which is the industry's highest performance processor. It is also renowned for its GPU by the name of Radeon. The company's chief rival in the computer processor market is Intel (INTC), whereas Nvidia is a tough competitor in terms of GPUs. AMD also produces Accelerated Processing Unit which is a combination of a CPU and a GPU which give it an additional processing capability along with integration with a customer's intellectual property, in addition to having the ability to being used by a number of different markets, as opposed to one.
AMD - An overvalued stock
AMD has a Forward P/E 26.36x as compared to Intel which has a forward P/E of 11.18x. This shows that AMD is by no means a cheap investment and it will not be able to maintain these price levels if it doesn't outgrow street expectations.
Recently, AMD has experienced mixed results with respect to products sales. The shipments of its desktop accelerated processing units suffered a decline of 9.6% QoQ while those of notebooks rose by 47.1%. However its PC shipments have declined by 15.8% YoY, keeping in view that the PC market is in a nosedive for some time now. Nvidia, however, has not suffered much at the hands of a plummeting PC market since it has a stronghold on the specialty PC gaming market which is gaining strength despite the overall decline in the PC market. This is not the case with AMD. AMD has been losing market share in the PC market pertaining to its inability to focus its attention to its GPU sector.
Despite these issues, investors have not abandoned AMD because future expectations from the company are high. The stock is overvalued because investors believe that AMD would bring greater returns in the future after seeing a downward trend in competitor Nvidia's image with respect to its mobile processor Tegra.
Investors might consider AMD a better option because its competitors are also not doing too well. Nvidia has suffered hefty losses in its mobile computing sector since last year, but that might not matter much since Nvidia is thriving in the PC gaming sector despite a declining PC market. AMD has also invested a lot in the console gaming market, but console gaming isn't faring as well as the PC gaming market. The recent launch of Play Station 4 and Xbox one are behind the speculation of AMD stock.
Also, AMD proves to be a risky long term buy since its price is more prone to rumors and its prices fluctuate very easily. It is thus a good buy for day trading rather than as a buy and hold stock.
Another reason for it being over valued is the investors' image of the company. A recent "Never Settle Forever" edition of the Never Settle game bundle program has helped improve the reflection of the company, since it enables gamers to choose from a variety of games for free instead of a single game with the purchase of an AMD Radeon graphics card. Thus investors could be viewing this as a positive strategy shift, expecting higher returns in the future.
Due to a downward trend in console gaming, AMD might suffer losses in the future lest it pulls back its concentration from the console gaming market and focuses on the PC gaming market, or even better, the handheld market, which is predicted to be taking over both consoles and PC s in the future.
AMD could concentrate more on the semi-custom chip (APU) business it launched this year, since it reduces its dependence on any one market, and diversifies the types and genres of OEMs that it can sell. This could prove to be a long term as well as a low risk revenue generator for AMD. This could prove as a buffer in a situation where one market could be failing against another. AMD is set to release a new class of APU by the name of Kaveri which could prove to be a big step for AMD. According to the CEO of AMD, the Kaveri is a 28nm APU equipped with Steamroller cores, an upgrade over Bulldozer architect, and it features Heterogeneous System Architecture (HSA). This can be an entry point for AMD into surround computing which is being considered by many to be the next big thing.
AMD's stock is currently trading at 3.66, with a high Forward P/E of 26.4x. Seemingly the stock might be coming down in the future, however CNN Money forecasts its price to have a median target of 4.00 in the coming 12 months, which is a 9.29% increase from its current trading price, with a high of $7.00 and a low of $2.00. Therefore, though it has its risks, there is a higher chance of its price rising instead of falling in the coming 12 months. However, the company needs to be very vigilant viewing the changing dynamics of the technology industry and the different markets it has stakes in.
Source: CNN Money
AMD presents a short term buying opportunity due to recent launch of new consoles and hype surrounding its Kaveri APU. However, the company is relying too heavily on gaming market. This is its biggest long term weakness. It is already losing market share in the PC gaming industry and expected slowdown in the console industry can threaten the buy thesis on AMD.