I pounded the table for Advanced Micro Devices (NASDAQ:AMD) six years ago, when it named Dr. Lisa Su as CEO. I liked AMD stock at $20, and even $40. It’s a great company. She’s a great leader. AMD makes faster microprocessors than Intel (NASDAQ:INTC). It’s competitive in graphics with Nvidia (NASDAQ:NVDA).
But at $88/share I have to say sell. The stock is now selling for almost 16 times its annual revenue. Its market cap is $106 billion on 2019 sales of $6.7 billion. We still can’t talk dividend because there isn’t any.
The only reason to own AMD is as a trade, a momentum play. I may be wrong, but I suspect the momentum is running out.
AMD Stock Is Great
What I call Moore’s Third Law of Management holds that the accelerating complexity of chips means such companies must have an entrepreneurial engineer firmly in control.
That’s Dr. Lisa Su. She’s a legend. She proved herself at Texas Instruments (NYSE:TXN), International Business Machines (NYSE:IBM), and Freescale, now part of NXP Semiconductor (NASDAQ:NXPI), before being recruited in 2012. She holds a Ph.D from MIT, where she worked on silicon-on-insulator technology, which creates a third dimension for chip designers. She’s still just 50.
Under Dr. Su, AMD sales have nearly doubled. Net income has increased more than four-fold. The company has overtaken Intel on the high-end of the processor market, something long-time CEO Jerry Sanders could only dream of.
Of course, Dr. Su got lucky. Sanders went up against Gordon Moore and Andy Grove in their primes. Intel became bureaucratic, sclerotic, and finally went full-on Game of Thrones under Brian Krzanich. It’s now led by the finance guy, Robert Swan.
Su was also lucky that her predecessor, Rory Read, did the hard work of cutting costs and pioneering new architectures before handing her the baton.
AMD had over 15% of the PC market in 2019. It has about 25% of the graphics processor market. Gains should continue in the former area, and the latter area is growing fast as data centers upgrade.
There’s a Limit
But there’s a limit to the value of any company.
Fundamentals should be that limit. Analysts at Tipranks have turned negative on AMD. Their average price target is below the current price. Only half are still saying “buy.” Some analysts are now saying “sell.” Investment professionals are listening closely.
The Zacks estimate for AMD stock is that revenues will come to $8.89 billion this year and $10.66 billion next year. That is growth of 20%. They even see earnings of $1.60/share next year. That means you’re paying 55 times forward earnings right now for AMD shares.
Some of the excitement over AMD represents depression over Intel. Apple (NASDAQ:AAPL) is replacing it. Its fabs aren’t as fabulous as those of Taiwan Semiconductor (NYSE:TSM). AMD is catching up, yadda yadda yadda. But cloud data centers don’t need the fastest chips. They’re designed to take the cheapest chips. Intel still dominates there. Intel also sports a dividend yielding 2.6%.
The Bottom Line
The trick with investing is to buy low and sell high.
Five years ago, AMD was in the dumper and Intel was riding high.
Today it’s the reverse. Intel’s fabrication is considered second-rate, and so are its chips. It desperately needs new leadership. It’s AMD that’s firing on all cylinders.
That’s precisely why now is the time to switch horses. Intel is aware of its problems. Even if Dr. Su doesn’t slip up, AMD’s valuation should decline on fundamentals.
Never fall in love with your investments, even if you love their leaders. You don’t have a profit until you sell and have the cash in your hand.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, INTC, TSM and NVDA.