AMD leads the battle against Intel but the war is far from over – global markets

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The last trading week belonged entirely to the stock of the computer chip maker, American American company AMD (Advanced Micro Devices) and its CEO – Lisa Lou. It started last Thursday night (July 23). At the end of trading, AMD’s big competitor, Intel, announced , The results for the second quarter of the year. The results were reasonable. The problem was looking to the future. Intel announced that there will be a delay of about six months until the arrival of 7 nanometers thick computer processors (nanometers = billionths of a meter) when the company faces difficult challenges. Also in the production of 10 nm thick AMD AMD, which has always lagged behind Intel, already produces 7 nm thick chips and is developing technology for 5 nm thick chips.

Intel’s announcement sent a sharp message to the market. Indeed, in trading on Friday the two stocks made a move of scissors. AMD jumped from $ 59 to $ 66, while Intel fell 17 percent from $ 60 to $ 50. During the current week the gap has widened. Yesterday (July 29), AMD released its second quarter results. The results look great. The company reported a 26% increase in revenue over the same quarter last year to $ 1.96 billion. Net income more than doubled to $ 216 million. The CEO, Lisa Sue, encouraged investors by saying that the company’s two most advanced computer chips (Ryzen and EPYC) were well received in the laptop and advanced server market.

Even before the announcement, AMD soared again and yesterday (Wednesday) reached an all-time high price – $ 76. In doing so, the stock completed a 30% jump in one week. The current price reflects the California chip company’s market value of $ 90 billion. Intel, whose stock has fallen 18 percent since the beginning of the year, is currently trading at $ 205 billion. Above them overlooks the graphics chip maker Anvidia, which is traded at a value of $ 250 billion.

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The ugly little sister
AMD is not a new player in the computer chip arena. She is the same age as Intel. It was founded in 1969, a year after Intel. And the two sit slowly far apart in Santa Clara California. Anvidia’s headquarters are also located not far away.

The rivalry between Intel and AMD has been going on for 5 decades. AMD has always been considered the ugliest little sister of the two. Intel has beaten AMD at almost all important nodes. The main crossroads was the long-standing partnership that Intel had with Microsoft. In the 90’s, when a personal computer became a basic product – Intel and Microsoft were the most powerful companies in the world. The symbiosis between them was even called “Wintel” (a combination of the words Windows and Intel).

Intel and Microsoft grew together with the PC market, while AMD was left behind. Its main problem with Intel was the quality of the processors, and the production output (Yield). Intel has always excelled in efficient and meticulous production, which has greatly helped its profitability.

AMD has held the position of “number 2 in the processor market” for years, but has not been able to make that position profitable enough. Intel has launched a new processor every 12-24 months, and AMD has not found an answer. Established in 1993, Anvidia took a different direction and developed mainly graphics processors. Those that use complex computer games that require a lot of computing power. In this way, it was able to avoid a direct war with Intel, which was focused in the late 1990s elsewhere, mainly on the development of communication chips. Intel on the other hand suffered from a series of failed acquisitions.

In 2009, AMD made an important change of direction. It has become a FabLess company. That is – a company that develops chips, when their production is done by outsourcing. It separated its manufacturing plants into a new venture called GlobalFoundries.

The new structure allowed AMD to concentrate more on processor development, closing gaps with Intel. This year, it seems, the closing of the gap is beginning to take tangible expression.

The new business model along with the charismatic CEO appointed to the position at the end of 2014 recently turned AMD into a hot technology stock. Past failures have been forgotten. The optimistic forecasts for the future have entered the center of the picture.

The interesting question now is whether AMD’s price is fair and represents an investment opportunity. Or is he already expressing too much optimism. From a superficial point of view, the price at which AMD is currently traded seems too high to me.

It starts with standard multipliers. A profit multiplier of 74 is very high, even for a growing company. A sales multiplier of 12 and a capital multiplier of 32 are also very high. They do not take into account that the war in the processor market is far from decisive. Intel can always go back to the top of the podium. It is still a company with much greater resources. Just for comparison – Intel’s annual sales stand at $ 79 billion. Of AMD for about $ 8 billion. In short – 10 times in favor of Intel. Intel distributes handsome dividends every year. AMD has not yet started distributing dividends.

AMD has great growth potential in the coming years. But its starting point against Intel is still a long way off. It is much easier to grow when your sales are tenth compared to your main competitor. It’s much harder to grow when sales reach $ 30-40 billion.

Either way – it’s gratifying to see that Intel is no longer alone in the game of computer processors. The competition is good for the market and good for consumers. At the same time, it’s better not to get too excited about AMD’s stock. At its current value, any tiny miss in business results or forecasts for the future could lead to a sharp cut in the stock. Do not believe? Ask Intel shareholders.

The author may hold positions in the securities mentioned in the article. The text should not be construed as a recommendation to buy or sell any securities.

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