AMD has yet to Make the Hoped-for Gains in Market Share, and Until then, Fatter Profits are Unlikely to Follow
AMD’s stock price has had a bad week but it’s still had a very good year. At its peak, the stock was up about 85% for 2019, before disappointing earnings pulled back those gains to around a 65% climb by the end of July.
While the stock AMD, +16.20% was hammered again on Monday, this time amid a fresh escalation in the U.S.-China trade war, the stock has been one of the best-performing components in the PHLX semiconductor index SOX, +2.69% this year. The company’s stock-market value has ballooned from under $10 billion at the start of 2019 to more than $30 billion at Monday’s close.
I believe investors have gotten too optimistic about AMD and remain so, even after the drop following the soft earnings and weak guidance. The significant growth forecast by AMD is unfounded, in my opinion.
Let’s quickly consider why the company has surged and then look at performance versus its nearest competitors to get a better sense of just how overpriced the company really is.
Can AMD Regain Market Share in Servers?
Yes, AMD has Rome, its new 7nm data center product that is supposed to fuel a run on Intel’s INTC, +0.94% successful server business. However, the market-share gains that AMD is making are still nominal. While CEO Lisa Su aspires to get the company back to the 25% market share it once held in servers, the company today is at more like 3.2% and so far, all of Intel’s woes in production, supply and security hasn’t seen that number change.
What the promise of these new products, coupled with Intel’s troubles, has done is cause investors to speculate that AMD’s new products will put a big dent into Intel’s server business. It hasn’t, and while AMD may make some small gains, overall, I don’t believe it will be much.
The one area where AMD had been doing the best was in PCs, but with Intel’s recent launch of its 11th generation ice Lake processors, Intel could potentially pull back some of AMD’s small market share gains here as well.
AMD vs Nvidia
It seems that with every AMD graphics launch, the company talks about taking huge chunks of market share from Nvidia NVDA, +2.84%. Yet, time after time, it rarely happens. When it does, it is at the lower price bands where profit margins are low.
The latest Navi launch this month is a good example. AMD talked a huge game about its performance and new architecture, and yet Nvidia has four products with higher performance than the AMD while also having more price-effective models to match. Nvidia pre-emptively struck with its Super line without breaking a sweat before AMD’s launch and took all the winds out of its sails.
How about that Instinct AI product based on 7nm Navi that was supposed to be out earlier this year? We haven’t heard much about it since, and my channel check indicates it has been retargeted as a VDI and cloud gaming card meaning AMD is still behind on the path to competing in AI training and inference.
Essentially the growth has come on what people think might happen, and it hasn’t materialized.
The Competition is Performing Better
Two of AMD’s closest competitors are Intel and Nvidia. Intel has delivered earnings per share of $4.30 over the last four quarters. After Monday’s decline, the stock is flat year to date with a modest trailing P/E of 11. Nvidia has delivered $5.32 EPS, and its shares have risen about 13% in 2019. Its trailing P/E is around 28.
AMD delivered a measly 8 cents per share in earnings for the second quarter. It hasn’t done much better over the last four quarters with only 18 cents. This means this year’s 52% surge in the stock price isn’t based on earnings (read: performance) but expectations about the future. While a company’s prospects are big driver of stock growth, given so little tangible success it’s hard to see why investors would continue to feel so upbeat about AMD’s prospects. This is further validated by the insanely high trailing P/E ratio of 155 — almost 16 times higher than Intel’s and five times higher than Nvidia.
So while both Nvidia and Intel are delivering significantly better earnings per share, their stock prices have only seen modest growth, and less than the S&P 500’s SPX, +1.88% 13.5% gains for 2019 through Monday. Meanwhile, AMD’s stock, despite the speed bump on earnings, is exploding, and the foundation simply doesn’t support it.
Looking forward, analysts tracked by FactSet expect AMD to deliver significant earnings growth at 94 cents per share in the next 12 months. However, without significant wins in both growth and market share in its data center and GPU businesses, I don’t see how the company can deliver nearly five times the earnings per share that it did in the past four quarters. Intel and Nvidia are expected to deliver $4.46 and $5.94 respectively — significantly more than AMD, but similar to their performance over the past four quarters.
Read Therese Poletti: All hopes for AMD now rest on the holiday season
Revenue growth without great earnings can sometimes be a way for investors to identify future value. Sometimes business can be capital-intensive up front, and significant revenue growth can provide encouragement. But AMD isn’t really hitting here either.
In its latest earnings report, AMD reported revenue was up about 6% from a year earlier. Margin growth on revenue was about 18% during that period. It fared better than Intel, where revenue also was up 6% but margin increased only 3%. Nvidia revenue was down about 2% with margins falling around 5%.
Regardless of the popular sentiment and market hype around its improved products supposedly aiding in AMD’s competitiveness against the likes of Intel and Nvidia, the market share gains haven’t been there and that means fatter profits are unlikely to be follow. And until there are solid signs that AMD can deliver in that way, the stock price is inflated. I believe investors would be better served to put their money elsewhere.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
The original version of this article was first published on MarketWatch.