AMD (NASDAQ:AMD) has had a tremendous run as it gained market share on Intel (NASDAQ:INTC)with faster chips. And, of course, that’s led to huge gains by AMD stock over the last few years.
But AMD looks like it has big, potential vulnerabilities when it comes to artificial intelligence and its dependence on China, and now the sleeping giant, Intel, is finally waking up.
Its chips appear to be catching up with AMD’s offerings and there’s evidence that AMD’s market share gains are slowing. There are signs that many if not most of the bigger computer makers may still want to partner with Intel rather than AMD. Finally, of course, as many have pointed out, AMD’s valuation is in the stratosphere.
Let’s take a look at each of these points.
AMD’s Vulnerabilities in AI and China
During Intel’s fourth-quarter results conference call last month, Intel CEO Bob Swan delivered extensive prepared remarks on the company’s offerings for AI. Swan noted that the company had acquired an Israeli maker of AI chips, Habana Labs, for about $2 billion.
As I reported in my recent column, “Intel’s 2019 revenue from its AI-based products came in at $3.8 billion.”
Conversely, AMD CEO Lisa Su waited to be asked about her company’s AI strategy before discussing the matter in-depth during her company’s Q4 earnings conference call. Specifically, Credit Suisse analyst John Pitzer asked: “How should I think about your positioning for AIs?” He also wondered whether the company was making investments in that area and if it had “unique” intellectual property it could leverage for AI.
Su responded that the company had won a deal to work on the Oak Ridge National Lab Supercomputer, and she said that the company was working “with large cloud providers” on AI, but she did not appear to articulate a new, specific strategy on AI going forward. She said that the company would rely on its existing graphics processing units (GPUs) and central processing units (CPUs) to support AI.
Moreover, another InvestorPlace contributor, Tom Taulli, wrote in a column published last month that “AMD has been lagging with AI.”
According to Analytics India Magazine, AI chips made by Habana are four times better than graphics processing units (GPUs)for supporting AI. The website quoted experts as saying that Habana’s chips have superior memory to GPUs, and that a great deal of memory is needed for AI.
Analytics India also reported that, in recent tests, Habana performed “great” and “was only second to Nvidia (NASDAQ:NVDA) in some categories.”
AMD could also be vulnerable to China’s extensive efforts to build its own semiconductor sector. In November, research firm Trefis reported that “China is the largest market for AMD’s products.”
Intel Is Striking Back
As I noted in my recent column on Intel, the venerable chipmaker is striking back at AMD in multiple ways. It’s going to release 10-nanometer chips, chips for servers with more cores, and chips that support graphics more effectively.
Further, “TechRadar recently reported that Intel’s upcoming flagship Core i9-10900K chip for desktop processors handily beats AMD’s competing Ryzen 9 3900X chip in terms of speed.”
I noted in my story that “Intel has been cutting prices on a number of its products that compete with AMD’s offerings.”
While a chip’s specs are important, they may not tell the whole story. Chips actually have to perform well once they’re installed, and they have to appeal to consumers.
AMD may have shortcomings in those areas. Specifically, The Verge reported in November that AMD chips installed in Microsoft’s (NASDAQ:MSFT) Surface Laptop 3 “still struggled with most games and even basic 4K video playback” and “was crushed in a head-to-head contest when it came to exporting video against the 13-inch, Intel-powered Surface Laptop 3.”
Moreover, Intel has better brand recognition, and consumer trust than AMD. The issues I’ve discussed in this section could explain why Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is closely partnering with Intel, not AMD, on its highly popular, rapidly growing Chromebook laptops.
These issues could also help explain why AMD’s share gains appear to be slowing and why Intel announced last month that it expected to have 50 new Windows and Chrome design wins.
AMD stock is trading at 32 times analysts’ average 2020 earnings per share estimate, while Intel ‘s equivalent figure is just 13.
The Bottom Line on AMD Stock
AMD seems to be way behind Nvidia and Intel in the important area of AI. Intel has taken steps to slow its share losses to AMD, and there’s evidence that AMD’s ability to make deals with prominent desktop and laptop makers is limited.
Nevertheless, AMD could continue to win some big deals, especially in areas where speed is paramount, like gaming. But given Intel’s multiple advancements and edge among many consumers, I’d be surprised if AMD’s growth this year will justify the huge valuation of its stock.
Consequently, I recommend that investors sell their AMD stock at this point.