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Is AMD's Rich Valuation Justified?

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AMD (AMD - Free Report) beat both EPS and sales estimates, but the markets were focused on a different metric. AMD outperformed on its PC-business but missed big on its non-PC business. AMD’s non-PC business consists primarily of data-center semis and gaming console chips for the next generation of consoles. Investors & traders are now reevaluating the stocks rich multiples and have pushed the stock down over 6% following its Q4 results.

Investors want to see AMD as more than just a PC company, but has AMD proven its ability to grow beyond this? The growth opportunity in data centers and other enterprise solution areas is massive compared to the declining PC industry. AMD has been able to take an increasing share in PC chips this past quarter, but investors are more concerned about the lack of growth in its data center business.

CPU & GPU Competition

Intel INTC is AMD’s biggest competitors on the CPU front, and its Q4 earnings report tooted a very different horn. Intel’s data center growth was massive this past quarter with cloud service providing customers driving 48% year-over-year growth.

Intel created the CPU space and has been the industry leader for half a century. The company had been dealing with supply issues for its 14nm wafers. These issues set the firm back in a space that is continuously progressing. Intel is finally resolving its production problems and is now at the forefront of data-center CPU demand with its 10nm chips.

Intel is the most trusted name in the semiconductor segment and will likely continue controlling the data-center CPU space as long as they can maintain an innovative edge as well as robust production. This is bad news for AMD and its stockholders as the markets have seemingly priced in AMD’s CPU takeover.

AMD is competing in the GPU duopoly with the category inventor Nvidia NVDA. AMD’s competitive advantage on the GPU front is its lower price offering. Nvidia’s chip performance is seen as superior to AMD’s. Nvidia has complete control of the data center GPU market as its chip capabilities have gone far beyond just rendering images. AMD will likely not be able to compete in this market, though their lower cost PC GPU’s give individual consumers some incentive to purchase these chips.

AMD Valuation

In my opinion, AMD is overvalued, and its massive 52-week valuation run-up is hanging by a thread. Q4 earnings are beginning to uncover the reality of AMD’s outlook. If AMD is unable to break into the data center space, it will significantly inhibit its long-term growth outlook. Below you can see AMD’s forward price-to-sales grew beyond the industry average over the past year or so.

AMD won the bid for the next generation of gaming consoles for Sony’s (SNE) PS5 and Microsoft’s (MSFT) next Xbox. This is a big win for AMD and is expected to drive a significant amount of growth in the second half of 2020. This could be AMD’s saving grace in its fight to stay relevant in the CPU and GPU chip wars.

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