FEBRUARY 8, 2020.
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Santa
Clara California’s a semiconductor cage match and AMD’s there. AMD is also a bullet-train of growth. Out of 17 stocks we track in the industry, AMD’s at the top in returns over six months, and 2nd YTD. And if you need a lift buy their stock, because they won’t be slowing to pluck you off the street.
“Street” you repeat? Well, you know Wall Street’s awesome. Think AMD. Where does the street send you when you beat? Down. And whadda you get when you dominate? A grubby paper bag clinging to a sweaty 40oz. What did you expect? Respect? Whadda you get for retina-detaching 300% y/y EPS acceleration? You get a 6% kick low in the gearbox.
Exactly why is Wall Street awesome again? Because they don’t take checks. You gotta pay your way in blood even If you are the reigning 500’s top performer 2019. But that’s O.K., because everybody’s still “Jonesing’ for Tiny Devices. AMD. Lift Your Love Lamp.”
nanometer, n. smaller than you think; one billionth of a meter. A sheet of typing paper is 100,000 thick, while a human hair between 80,000-100,000 nanometers wide.
ran·sack, V. go hurriedly through (a place) stealing things and causing damage.
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“burglars ransacked her home”
Markets
never promise anything. You have to make it. AMD did, at 49.9% y/y revenue growth. You saw that. You also saw that sticker on your PC. “Intel inside.” Doing what? What the sticker didn’t say was that AMD was busy outside, busy lifting weights and building chips, doing odd jobs to get by, and dining at 7-11. They were also burning piles of cash Q over Q. Years went by, and Intel was still inside, slouching and watching daytime television. AMD was still outside, but tapping on the door. AMD was also busier now, shrinking their borrowed stack at lightening speed, building even smaller, and better, and still dining at 7-11 in Santa Clara.
In 2017 AMD quit tapping. Huh? They were kicking now and splintering the hinge beam on Intel’s shaky front door. They were even busier staunching their hideous cash bleed, and now building at 7 nanometers. Intel couldn’t focus that small, or maybe at all. Intel was indeed still inside, but mainly out of habit. They remained busy, out of habit, mostly building a queasy sweat behind intractable production problems at 10 nanometers. That was 2018.
In 2019 AMD began kicking panels straight out of Intel’s 10 nanometer door. Intel looked on, as AMD began ransacking market share like some crazed all-pro pass rush. Ransack. And for the rest of the year AMD roamed Intel Land ramming share into one fat ass sack, amen.
The
semiconductor industry is likely to enjoy improving circumstances in 2020; lighter geopolitical risk, improving cloud cap-ex spending, ramping 5G investment, and a relatively healthy global economy. No one knows how the coronavirus outbreak will unfold. Two particular drivers exist for AMD. The data center server market and the video game console refresh cycle set for the back half of 2020. What does CFRA Research say about the business environment specifically? “…we think the industry witnessed a cyclical trough in the second half of last year and see conditions progressively improving through 2020.”
AMD’s future as a whole looks extremely bright, as its’ products are increasingly more powerful, faster, smaller, more energy efficient, and cheaper. It’s also riding the multiple macro-trends of 5G and the IOT, meaning holistic digitization and connection of everything. But of course, the business is highly cyclical, feast or famine.
Fact. The semiconductor space is complex, complicated, hyper-dynamic, and hyper-cyclical. It’ s feast or famine, 24/7 full-on, or switched off ghost town with heaping boxes of unsold inventory. Inventory does not magically vanish. Inventory represents idle investment dollars, and often diminished profit. Inventory is worked through over time. Additionally, product cycles are relatively short, and profit-crushing innovation routine. The industry is frenetic and brutal, even to its’ leaders.
AMD’s
share price tripled in 2016, dropped 9% in ’17, ripped up 80% in ’18 , and another 148%-150% in 2019, depending on the source you use. And all of that is even more impressive when understanding that they were savagely outperforming the industry as a whole.
And now? What did Cowen analyst Matthew Ramsay have to add on Q4 results? “…the relatively unimpressive guidance was due to weak sales of videogame consoles.” The next generation of consoles is coming in the back-half of the year, so hang-on. “Not much fundamentally changed,” Ramsay added. Well, of course. In the end, the price drop was all about Fa King expectations, profit-taking, and elevated fears of a pull-back.
At
this year’s Consumer Electronics Show(CES) AMD announced a 3rd generation Ryzen mobile processor for PC and laptop, an expanding market share business for them. They displayed a mid-priced Radeon gaming GPU, believed to power the coming generation of XBOX and Sony PlayStation. Additionally, they introduced “Threadripper” a new high-performance desktop CPU. What does Argus’s latest research have to say about AMD’s just reported quarter?
“For 4Q’19, Computing & Graphics (C&G) revenue of $1.66 billion (78% of total) rose 69% annually and 30% sequentially – a second consecutive quarter of 30%-plus sequential growth.”–Argus Jan. 30, 2020. Rating: BUY.
On the 28th last month AMD reported Q4 Non-GAAP EPS of $0.32 a share against consensus of $0.30, or $0.31, depending on whose data you read. The chip designer/developer reported revenues of $2.13 billion against a lower $2.11 billion consensus. That’s known as a “top and bottom line beat.” Nice. But it guided to a Q1 midpoint of $1.8 billion. Oops. That was the complaint. Full year guidance is strong, yet Q1 guidance sucked all the air out of the report. The Q1 midpoint for analysts’ was $1.86 billion. And that, they say, was that.
Following AMD’s blow-out price performance in 2019 expectations ballooned. AMD was “priced to perfection.” What did Lisa Su, AMD’s CEO have to say? “2019 marked a significant milestone in our multi-year journey as we successfully launched and ramped the strongest product portfolio in our 50-year history,” CEO Lisa Su. Advanced Micro Devices earnings press release.
Is
AMD a good stock? Is AMD a buy? Maybe. AMD’s latest tare began at a $28.23 bottom last October 8th, running to a $52.81 high at the close on 1-24-20. That’s an 87% move in 3.5 months. The move was nearly straight up. Then came Q4 on Wednesday and a more than 6% fall. No worries. Yet we are reminded of a past fall, a much larger fall in the autumn of 2018. In September of ’18 Advanced Micro was again roaring, this time in part due to excitement over its’ 7 nanometer chip, and also in response to arch-rival Intel’s production problems surrounding it’s 10 nanometer chip.
But quickly a research report suggested Intel’s production issues weren’t that bad. Weakness hit AMD’s share price creating a peak on September 14th ’18 at $33.09, intraday. Following that it proved a battering downhill trip from there. Then AMD missed Q3 2018 revenue, and revenue guidance for Q4. sending shares still lower. The share price skidded again lover when the current INTC report posted better than expected. In total shares plunged 47.9% in six weeks; see the chart below. Pure ugliness like this is also a common characteristic of high growth or momentum stocks, like AMD.
The 2019 AMD chart is a break-neck rocket ride. That alone suggests concern. All runs end and spectacular runs quite often end spectacularly. Yet what about that FY 2020 EPS growth? Non-GAAP estimates for 2020 are now ranging between 74%-79%, at $1.15 a share.
It
may be surprising to realize that AMD only went EPS positive in 2017. Since becoming profitable the company has Improved margins, reduced debt, & costs, and created the strongest lineup of products in its’ history. AMD’s gross margins rose from 38% in Q4 ’18 to 45% in Q4 ’19. Over the same period operating margins exploded from 2% to 16.3%. What’s next? AMD’s upping it’s game for the server market. “The company plans it’s 3id-generation of EPYC processors codenamed Milano and based on Zen 3 architecture, to be released in 2020, with Zen 4 based EPYC Genoa planned out for 2021.”–Roman Luzgin, Seeking Alpha.
What can we expect for the semiconductor industry just ahead? CFRA suggests: “We expect revenue for the semiconductor space to rebound 5% in 2020 after our projection for a 10% decline in 2019 — compared to a 14% increase in 2018. We see growth aided by greater demand in data centers as well as content growth within the automotive and industrial end markets.”–CFRA.
The death of the PC has long been exaggerated, yet very little is expected from the PC/laptop market this year, despite AMD’s work. Smartphone unit demand is believed to be in rebound mode now, following three straight years of decline. The market is saturated and the replacement cycle now longer. That leaves the data center, automotive, and the nascent 5G ramp. All three offer nice demand prospects, and tremendous long-term opportunity.
AMD’s growing strength of technology assures that they will participate in the on-going data center expansion. As well, increased content per unit will be required to support autonomous vehicles, and their infotainment systems. AMD will be there. Those vehicles, and the IOT, will demand vastly more data center capacity–creating a virtuous cycle of growth. Further, 5G will require a vast/dense infrastructure of transmitting base stations, and a new generation of smartphones to tap it. Again, AMD. Federal security and trade policy concerning back door Huawei remain wild cards. The IOT, autonomous vehicles, and 5G are all megatrends.
STOCKJAW
Absolutely AWESOME article.
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Hey Fitz, appreciate that so much. Hope your project is proceeding well. Sj
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