AMD: More Magic Left

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About: Advanced Micro Devices, Inc. (AMD), Includes: INTC
by: Stone Fox Capital

Summary

The market is too focused on where AMD came from in this cycle due to irrational lows.

Compared to past trends with Intel, AMD hasn't reached market share levels, EPS numbers, or stock prices to even closely match past achievements.

Analysts are only tepidly bullish on AMD with the majority of analysts having Hold or Sell ratings.

The dip to $26 is an opportunity after a weak market over the last week.

Historically, Advanced Micro Devices (AMD) has generated a more volatile earnings trend than that of rival Intel (INTC). The weak link in the market always takes the hardest hit in down cycles as the market leader can squeeze profits. The recent dip in AMD to $26 is due in part to misplaced market fears that Intel is roaring back to life to reinsert their dominance. The data doesn't support this scenario, keeping us bullish on AMD having more magic left in this cycle.

AMD Epyc magic

Image Source: AMD website

Revisiting An Old Trend

Since 2001, the EPS trend has typically gone in the same direction, with AMD hit harder by downturns, leading to substantial losses. The trend was much more positive for AMD back in the '90s.

Chart

AMD EPS Diluted (TTM) data by YCharts

The difference since 2010 is that AMD hasn't been hit with the massive losses of the past. Sure, the chip company wasn't profitable in many of those years, but the chip company has been far more stable in the last five years. AMD remains on the path to closing the EPS gap in a big part due to the resurgence in the server market.

Back in 2006, AMD claimed nearly 24% of the server chip market. Of course, Intel came roaring back and reclaimed all of the lost market share in the next decade, leaving AMD with minuscule market share by 2015.

Source: Marketwatch

With the expected upcoming release of the Epyc 2 chip, the company expects to at least approach 2004 or 2005 market share levels. The difference this time is that AMD doesn't need the server market to turn profitable. Market share in this higher margin business will lead to a substantial improvement in already solid profits.

The current EPS trend appears more like the 1990s when AMD would leapfrog the EPS of Intel. The company has been closing the gap since 2016, and the forecast is for AMD earning about 0.16 of Intel in the next fiscal year. Naturally, this number will be substantially higher if AMD meets the higher EPS targets of analysts.

Chart

AMD EPS Diluted (TTM) data by YCharts

An interesting note is that AMD traded up to $40 back in 2006. The company is as strong as ever and Intel appears as weak as anytime in the past, yet the gap in their earnings streams and stock price is still rather large.

Chart

AMD data by YCharts

The last time AMD took over 20% of the server chip market, the stock topped the price of Intel. For the cycle to repeat, AMD will need to reach much higher profits before Intel actually gets it together to stop the advancement of AMD. The stock would need to reach $50 to top Intel this cycle.

The point to this analysis is for investors to understand the context of the recent rally. The surge above $30 isn't even historically significant.

Intel Gift Keeps Giving

My investment thesis last week highlighted how the market sold off AMD due to an irrational analysis of the Intel update. The dip has continued into this week as market weakness and some more irrational views on the Intel update emerged.

Bloomberg quoted BlueFin Research Partners as suggesting that Intel had made so much progress on the 10-nm production that a ramp up could occur in April, ahead of a June ramp that would place supplies on the market around back-to-school season next year. The confusion is that the target is only four to six weeks different from market perceptions.

Some of the markets possibly misunderstood the difference between production ramp and supplies reaching market. Intel would go from holidays to possibly back to school season, but the company would still have nearly a year before 10nm reaches the market.

The more worrisome suggestion from SemiAccurate is that Intel made the decision to lower standards and relax design rules in order to push the 10nm onto market next year. The suggestion here is that these will actually be similar to a 12nm process node. Such a move would actually fit with my contention that the Intel update was to detain customers from defecting to AMD.

Remember that analysts aren't actually that bullish on AMD. The stock only has 13 Buys and 5 Sells with an incredible 15 Holds. Typically, a stock on a momentum surge has an extremely bullish analyst community vs. one that's just slightly on the bullish side.

Source: Seeking Alpha analyst ratings page

Takeaway

The key investor takeaway is the market is focused too much on where AMD came from this cycle than where the company tends to reach in bullish trends. Back in 2006 and 2010, AMD generated EPS totals similar to Intel and even saw the stock rally past the level of the market leader in 2006.

From a historical context, the magic of AMD is only starting. Don't exit a position too soon as this run could have another year or two left with AMD further closing the gap with Intel to just rhyme with past cycles. AMD appears more powerful now with high-end chips competitive with the market leader. If anything, the opportunity appears for AMD to take more market share this cycle.

Remember that the market and especially the analyst community isn't actually that bullish on AMD.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMD over the next 72 hours.

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.