<p>In 2019, there was concern about Advanced Micro Devices’ (NASDAQ: AMD) high exposure to China during the US-China trade war. (The days when the trade war dominated the headlines on business news seem like a long time ago, right?)
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In 2018, Goldman Sachs estimated that approximately 26% of AMD‘s revenue came from the Asian country. But now we are in February 2020, when the majority of China’s companies were shut down for a few weeks and the country’s economy slowed down enormously due to the coronavirus from China.
Although AMD has trimmed its exposure to China since 2018 (I could not find a more recent estimate of the percentage of the company’s revenue coming from China), I find it hard to believe that the company’s first quarter results will not take a large here.
I know that AMD has said that they expect the Q1 revenue to be at the bottom of their original guidance and that they will keep their original year-round guide. However, it sounds far too optimistic for a company that is likely to receive 20% or more of its revenue from the country that (with the possible exception of Italy) has taken the biggest actual hit from coronavirus.
AMD faces other short-term threats
In addition to coronavirus, the company faces two other challenges that I have discussed long before: product enhancements and price reductions from Intel (NASDAQ: INTC), as well as AMD‘s apparent inability to match Nvidia (NASDAQ: NVDA) and Intel in terms of artificial intelligence. New developments in both of these areas have intensified my concerns about the AMD stock.
Specifically, as I reported in a new column on Intel, ExtremeTech stated on February 26 that the giant chipmaker intends to lower “the price per core of its Cascade Lake chips for servers.” Furthermore, Intel is lowering the prices of its desktop chips and adding hyper-threading to them.
At the same time, the technical website Engadget reported that “Intel’s new desktop chips” should be competitive with AMD‘s Ryzen 9 chips, both in terms of performance and price. Engadget also stated that Intel’s chips would use more power than AMD‘s offerings. But as I noted in the previous article, I do not expect it to meaningfully discourage companies or consumers from buying Intel chips.
On the AI front, I reported that researchers from Rice University, in collaboration with Intel, “have reportedly been able to radically increase the speed of Intel’s Xeon chips used for AI training. As a result, Xeon is now ‘3.5 times faster than Nvidia’s Tesla (chips) in AI deep learning ‘, according to wccftech. “
Even before that innovation, AMD was seen as the successor to Nvidia and Intel’s Habana unit when it comes to AI. But after the latest developments, AMD is probably much further behind in vital technology.
With the use of AI now an integrated data center tool, AMD’s deficit in AI chips is likely to hurt it in the short and medium term. And since data centers’ use of AI is expected to accelerate in 2021, this issue will be an even bigger problem for AMD in the long run as well. As a result, I have serious doubts about the company’s ability to meet its long-term financial guidance.
Other long-term issues
Some members of the Trump administration are pushing for new restrictions on US chip exports to China, The Wall Street Journal reported on March 9. These restrictions “could cost U.S. chipmakers about $ 36 billion in revenue,” the Boston Consulting Group found in the paper.
With its heavy reliance on China, AMD would likely suffer from such restrictions.
At the same time, China is rapidly accelerating its own chip production. As of November, it produced 16% of its land, but it wants to increase that share to 40% this year and 70% by 2025, the BBC reported in November. In the long run, it could be very bad news for AMD.
Valuation and final result for AMD shares
Despite its recent pullback, the AMD stock is still trading at 42 times analysts’ average earnings per share for 2020, so it’s not cheap. In the meantime, its coronavirus hit may be bigger than expected and its lack of leadership on the AI front is likely to match its sales in the future.
Finally, China’s operations are facing growing threats. Given these points, I would avoid AMD shares now.
At the time of writing, Larry Ramer did not own shares in any of the above companies. Larry Ramer has been researching and writing articles about US stocks for 13 years. He has been employed by The Fly and Israel’s largest business magazine, Globes. Larry started writing columns for InvestorPlace 2015. Among his very successful, conflicting choices have been GE, Sun Warehouse and Snap. You can reach him on StockTwits at @larryramer.