Why Advanced Micro Devices Stock Popped Today

Friday is looking like it’s going to be a rough day to own Intel stock, with shares off 2% on news that the company will delay start-up at its new semiconductors factory in Ohio. That’s the bad news for Intel shareholders today.

The good news is for investors in Advanced Micro Devices (NASDAQ: AMD) — because what’s bad news for a competitor could be great news for AMD. And through 11:30 a.m. ET, AMD stock is up 3.2%.

What Intel said

Up until recently, Intel was planning to begin production at a new chips facility just outside Columbus, Ohio, as early as 2025. But as The Wall Street Journal reports this morning, weak demand for computer chips, combined with delays in the disbursement of U.S. government subsidies under the 2022 CHIPS and Science Act, is pushing back that timeline to 2026 at the earliest.

On the one hand, this isn’t necessarily horrible news for Intel, because any delay in construction and start-up will delay its need to invest the $20 billion (rising eventually to $100 billion) it must spend to get the manufacturing complex fully built. On the other hand, though, any delay in start-up will also delay Intel having a lot more chips to sell.

For AMD, however, this news is good. Why? Because one of the reasons Intel is delaying production is that demand for semiconductor chips (for everything but artificial intelligence) in the highly cyclical semiconductor market appears to still be rather weak. Dumping a whole lot of brand new Intel chips on the market would push prices down and delay a recovery in the market — and so a delay in Intel’s production should help prices for AMD. Taiwan Semiconductor Manufacturing‘s announcement that it will similarly delay construction of a $40 billion chips plant in Arizona makes for a double dose of good news for AMD.

Is AMD stock a buy?

Now, is this news good enough to make AMD stock a buy? Well, don’t get too irrationally exuberant about that just yet.

AMD is certainly a fine company, and AMD stock will certainly benefit from having less price competition for the next year or two. However, AMD stock still does sell for a pretty penny — roughly 250 times trailing free cash flow, more than 320 times trailing earnings, and about 46.5 times the money it’s expected to earn even if prices (and profits) start improving this year.

Granted, analysts see strong prospects for AMD over the next few years, with free cash flow set to roughly quintuple (to $5.1 billion) this year, then more than double again (to $12.4 billion) by 2027, with earnings growing faster than 40% per year. If those estimates are correct, at current prices, AMD stock sells for about 22 times estimated 2027 free cash flow. That’s a very fine valuation — but on profits that are still four years away.

As for today, the best I can say about AMD stock is that it might be fairly valued at current prices. I’d wait for something better than “fair” to buy this one.

Should you invest $1,000 in Advanced Micro Devices right now?

Before you buy stock in Advanced Micro Devices, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Advanced Micro Devices wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks


*Stock Advisor returns as of January 29, 2024


Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Why Advanced Micro Devices Stock Popped Today was originally published by The Motley Fool

Source link