Almost exactly four years after the day after Advanced Micro Devices (NASDAQ 🙂 were on the brink of extinction, the manufacturer of microprocessors (CPUs) and graphics processing units is back from the dead – and its inventory is amazing 1840% of where it was traded in July 2015.
At the time, AMD shares reached a historic low of $ 1.61.
Fast-forward to July 2019: the shares closed at $ 31.19 yesterday, only a 9% discount on the 13-year price of $ 34.3. How did AMD manage to turn things around and what would that mean for future prospects?
Strategic positioning
The California-based company was founded in 1969 and did not enter the CPU business until 1996. For most of the 21st century, AMD & # 39; s offer competed at the bottom of the chip market. Their traditional customer was a price-conscious computer enthusiast. AMD products were considered decent and were often sold at lower prices than competing products.
This strategic focus made AMD a household name in the early 2000s. Unfortunately, AMD products were popular, but the low-margin strategy was not profitable.
In 2015, when market leader Intel (NASDAQ 🙂 struggled with the development of the latest generation of chips, AMD management saw an opportunity and decided to turn to the pinnacle by developing products that would compete directly with Intel and NVIDIA ( NASDAQ 🙂 products. The shift has yielded three years in a row for AMD with a gain of 8%, 21% and 23% respectively from 2016-2018.
Technological lead
To make the switch to the production of more expensive products, AMD had a serious gap between product performance that had to be closed quickly. In this, the company benefited as much from their own strategic ingenuity as from the market break caused by the stagnation of Intel.
Intel chips have been stuck since 2014 with a processor and architecture of 14nm. They had originally promised to introduce a 10nm processor in 2015, but repeatedly encountered production issues, pushing the release initially to 2017 and then to Q3 2019. write, it will take almost five years since Intel chips have made significant progress in microarchitecture.
AMD, on the other hand, switched their production processes and started working with Taiwan Semiconductor Manufacturing Company (NYSE :), using the services of TSMC to produce chips designed by AMD. The collaboration offered the American chip maker a few advantages, including access to TSMC's 7nm microarchitecture, which offers a better per-core frequency that adds more computing power to each chip.
These improvements now put AMD & # 39; s latest generation CPU & # 39; s – scheduled to launch on July 7 – at par with the chip performance of Nvidia and Intel, but at a lower price. The Ryzen 5 CPU from AMD will sell for $ 199 compared to the i9-9900k from Intel, which is sold for $ 499.
Breakthrough leadership
The spectacular reversal of AMD can be demonstrably attributed to one particular event: the hiring of CEO Lisa Su in 2014. A PhD holder in electrical engineering, Su is considered the center of AMD's comeback and is responsible for much of the strategic and changes in production.
Last month, Barron named her one of the & # 39; World & # 39; s Best CEOs & # 39; because she & # 39; Intel Corp. gave a run for his money & # 39 ;. Although NVIDIA remains strong under co-founder Jensen Huang, Intel faces management challenges under former CFO, now permanent CEO Bob Swan.
Conclusion
But as every investor knows, past performance is not necessarily indicative of future returns. And currently, AMD shares are not cheap.
The company trades against 125 times the current profit and 30.7 times the advanced profit. With a market capitalization of $ 34 billion, it also trades at 5.6 times the sale, after bringing in a $ 6.1 billion turnover in the last 12 months
However, AMD seems to be on its way to becoming a major player, although they have not yet succeeded in bringing their two more established rivals to the right. Nevertheless, with two consecutive years of more than 20% revenue growth behind it, the future looks promising.
However, given the parabolic growth of its shares, it is difficult not to think that investors might be a bit ahead. Intel and Nvidia will not give up positioning without a serious fight. Both are also still far ahead of AMD when it comes to reach, war coffin, sales and net income.
Intel is still the clear market leader with sales of $ 70.8 billion, followed by $ 10.7 billion from Nvidia; AMD routes with $ 6.1 billion. Similarly, Intel brought in $ 20.5 billion in net revenue while Nvidia brought in $ 3.3 billion. AMD lags far behind at $ 272 million.
AMD could, of course, continue Cinderella's growth story, but in our opinion, the risk-return ratio is not good enough at the moment. Wait until a withdrawal yields more reasonable numbers before you initiate a position.
