Advanced Micro Devices, Inc.: Will AMD Stock Pan Out for the Long Term?

AMD StockAdvanced Micro Devices, Inc. (NASDAQ:AMD) stock purchased on January 3, 2011 is worth some 30.0% less today.  AMD stock has provided investors with a compound annual growth rate (loss actually) of -6.91%.

Now, in fairness, AMD stock is up more than 233% since the beginning of 2016, but, as we look out another five years, what might investors expect from AMD stock?  Will its performance mirror the last five years or will it look something more like the last eight months?  Let’s take a closer look at the pieces that make up AMD.

AMD Stock’s Market Focus

AMD stock is divided into two reportable segments: “Computing and Graphics” and “Enterprise, Embedded and Semi-Custom.”  The company identifies its growth opportunities coming from three distinct markets: gaming, immersive platforms (virtual reality), and data centers.  AMD posits that between these, the total addressable market is better than $53.0 billion. (Source: “Investor Presentation,” Advanced Micro Devices, Inc., last accessed September 14, 2016.)

There is no doubt in my mind that the markets for gaming and virtual reality are huge and growing.  But AMD faces a lot of very tough competition in these sectors, most notably from the industry leader, Intel Corporation (NASDAQ:INTC). Intel commands a whopping 71% of market share over AMD’s current 12.3% piece of the pie. (Source: “Desktop GPU Average Selling Prices Rocket to New Record; Discrete Desktop GPU Shipments Continue On-Year Growth,” Mercury Research, August 22, 2016.)

Stealing market share from Intel and from the self-proclaimed inventor of the graphics processor unit (GPU), NVIDIA Corporation (NASDAQ:NVDA) will, in my opinion, be a meaningful task for AMD. This is especially the case, given that Advanced Micro stock has reduced spending on research and development from more than $300.0 million per quarter five years ago to less than $250.0 million per quarter now. (Source: “Advanced Micro Devices Research and Development Expense (Quarterly),” Ycharts, last accessed September 13, 2016.)

More problematic for Advanced Micro stock, in my opinion, is the fact that when AMD addresses growth opportunities in gaming and immersive platforms, they do it in the context of their Computing and Graphics segment, which is still focused on the traditional personal compyuter (PC) market.  PC sales have been in decline since 2011, which could explain the poor performance of Advanced Micro stock over the last five years. The last quarter of 2016 isn’t going to present any form of turnaround for PC sales.  While some expect as much as 4.0% growth in 2017, when you look closely at the data, you find that “deskbased PC” sales are estimated to continue to decline into 2019. (Source:  “PC Sales Bottoming Out,” Gartner, Inc., March 1, 2016.)

AMD’s focus on the data center business may, however, be the company’s bright spot.  When AMD books data-center-related sales, it goes through its Enterprise, Embedded and Semi-Custom segment.  This segment accounts for nearly 60% of Advanced Micro stock’s revenue and shows real growth prospects.  Between the first and second quarters of 2016, revenue increased about 59% in the segment.  Year-over-year, they were up about five percent. (Source:  “Quarterly Earnings,” Advanced Micro Devices, Inc., last accessed September 13, 2016.)

AMD’s new “Zen” architecture shows that the company is focusing attention on its Enterprise, Embedded and Semi-Custom segment.  As such, I believe AMD could be a big beneficiary of the growing demand for cloud-based computing and high-density servers. (Source:  “AMD Demonstrates Breakthrough Performance of Next-Generation “Zen” Processor Core,” Advanced Micro Devices, Inc., August 18, 2016.)

Too Early to Tell if AMD Stock Is Ready To Soar

For me, it’s still too early to tell if changes at Advanced Micro stock will set the stage for a new era of growth.  Computing is changing rapidly, and chip makers can no longer rely on “Moore’s Law” to bail them out.  Virtual reality, artificial intelligence, deep learning machines, and cloud-based computing are forcing chip makers to come up with ways to pack more power into chips.  AMD says they are up to the task.  If they are, then AMD stock could be ready to soar.