Shares of Advanced Micro Devices, Inc. (AMD) surged in daily trading on news reports that AMD's new ultra-fast chip would be in Dell Inc.'s Alienware Area 51 gaming personal computer. The chip is called the Ryzen Threadripper and competes directly with Intel.
Skepticism About AMD
The report in Digitimes.com says that Dell's use of the chip could lead more gaming manufacturers to use the processor, potentially boosting AMD's earnings. But it's entirely unclear if this will boost AMD's stock. The shares have more than doubled in the past year but are a fraction of their price in the year 2000.
Let's look at the latest news. Dell last week said it will debut two new versions of Area 51 desktop. One will use AMD's chip, the other Intel's X-series processor. Also, Dell said it would be the exclusive, original manufacturing launch partner for making computers that are pre-built with AMD's chip. With Dell's stamp of approval, other manufacturers are more likely to use AMD's chip when the exclusivity period ends.
A key factor driving up AMD's stock may be the belief that broadening use of the AMD chips could lead to a sharp increase in sales. But a warning sign is that analysts don't appear to be factoring this growth in, at least thus far. Revenue estimates for AMD have not risen since early May.
On the surface, shares of AMD look relatively inexpensive. They sell at a price-to-sales ratio of around 2.2, which is a bargain in comparison to NVIDIA Corp. (NVDA), Intel Corp. (INTC) and Taiwan Semiconductor Manufacturing Co. (TSM).
But analysts are rightly cautious because AMD's revenue stream and growth rate have been inconsistent for the past decade compared to rivals, causing erratic performance in the stock.
AMD also has the worst gross margins compared to its peers, under 24 percent over the trailing twelve months, while NVIDIA, Intel andTaiwan Semi are all in the in 50 to 60 percent range.
To be sure, AMD's new processor and deal with Dell are positive news. But AMD's poor performance on gross margins and earnings bode ill for the future. In addition, the computing and graphics segment of the business is less than 50 percent of the total revenue stream, and would have to see a growth rate of almost 17 percent in 2017 even to match the revenue of the Enterprise side of the business in 2016.
All this adds up to one thing. AMD's expanded sales of chips for the video game sector doesn't make the stock a sure winner.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.