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A ‘Rich’ Valuation?

October 5, 2018 / Hamza Ahsan

This summer has been a particularly hot one for microprocessor manufacturing companies like Intel and Advanced Micro Devices (AMD). In April 2018, AMD’s stock has surged and gained more than 200% in value, whereas the monopolistic market leader Intel has shown little movement. The rise comes partly from the struggles that Intel is facing with its chip-making process; AMD continues to gain market share at its expense. AMD stock exploded after first-quarter results, crushing analysts’ earnings and revenue estimates, then a second time, in the second quarter, smashing analysts’ forecasts. In the meantime, Intel’s has delayed the production of its 10-nanometer chips to 2019, leaving AMD an open field to play with its 7-nanometer chip, which will be launched later this year.

Intel’s stagnant position has resulted from two major security flaws: Meltdown (security vulnerability), which allowed hackers to steal all the memory contents of computers, and CEO Brian Krzanich’s resignation over his secret relationship with a subordinate. Meantime, Intel delayed its next-generation hardware. Nevertheless, Intel share has remained relatively stable and fell by less than 12%. This shows the investors’ confidence in its market dominance and its imperceptibility to a bad image.  AMD, on the other hand, has shifted to targeting high-end users and increased sales by 53 percent from last year following the appointment of new Chief Executive Lisa Su in 2014. This gave AMD an open ground; its fast-paced stock surge, however, is to be met by Intel’s next-generation chips that will reestablish the competition.

Some historical insight of both companies helps us understand the underlying principle for both companies’ market standing. From Q1 2012 to Q2 2015, Intel grew its market share from 59.1 percent to 75.2 percent of the market, while AMD and Nvidia (third company in GPU manufacturing) were accounting for less than 25 percent combined. Following 2016, Intel shares dipped to the lowest of four years. While Intel was not a major stakeholder in cryptocurrency boom, AMD shares dipped after losing market share to Nvidia. AMD’s stock bottomed out in Q2 2015. But following the launch of Ryzen Mobile, AMD hit a four-year record for market share but its current market share is still close to 13 percent. It’s clear that these gains are temporary.

Given AMD’s attempt to gain market share, investors have responded in an unprecedented manner, which surged the share value by more than 200 percent. This reflects market sensitivity as a result of high speculation and expectations by investors, which has created market value that is short-lived and unsustainable in the long-run. However, some analysts are still optimistic about AMD’s future and growth. While Intel aims to keep its prices low to maintain its market share, AMD’s investors can at least take comfort from all the high-profile partners that AMD has landed with its new chips: Dell, Lenovo Group Limited, Hewlett Packard Enterprise Co, Microsoft Corporation, Baidu Inc, and others. With 79.1% market share for Intel and 20.9% for AMD, Intel may be the current leader,  but AMD’s move from targeting the masses to focusing on high-end processors may spell trouble for Intel’s market share.

Despite the momentum, AMD’s stock may plunge in the following weeks. In fact, we see the AMD is currently undergoing a correction. According to our technical analysis, 25 days Moving Average has acted as support for this movement. As long as the chart maintains its position above EMA 25, AMD is expected to keep its trend. But recently, AMD’s dip below EMA 25 is a signal to keep an eye over its movement. If the chart dips further and fails to break the new support, one should move out of the long position. In my opinion, given the fast-moved stock and Intel’s imminent comeback with a stronger position, one should be thinking about shorting the stock for the next couple of months.

In my opinion, AMD’s stock surge is legitimate for many reasons. Notwithstanding, Intel, having been the market leader for many years, is expected to regain its throne and give AMD the competitive environment that it has been facing for a long time. Furthermore, as can be seen in the market’s indifference to Intel’s scandals and its the sensitivity to AMD, we can infer a strong support for Intel and less-so for AMD, indicative of the market’s view of Intel and AMD’s respective positions. In fact, taking into consideration AMD’s meteoric rise, we expect market wariness, and probably a few long squeeze-plays.

The recommendation is to short AMD, most likely taking a script or shorting CFDs as AMD isn’t expected to tank but probably decrease continuously until the market has priced in AMD’s current standing.  Tailwinds for any short-term bearish plays are nevertheless expected, especially since Moody recently upgraded AMD, citing strength in gaming consoles like the PlayStation and the Xbox. Yet, as the market closed below the support, expectations AMD to break through the resistance and regain momentum are low. Therefore, AMD is suspected to be a small bear at least unless CES 2019, where AMD plans to unveil its Zen-2 based processors, on January 8th, 2019.  All in all, if one remains skeptical, one should wait for the market to try to reach the support level again. Once the market fails to break through, it is strongly recommended to short the stock and maintain a bear at least for a medium-term.