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2 Pros, 2 Cons to Investing in Advanced Micro Devices, Inc. Stock

Will Healy

Advanced Micro Devices, Inc. (NASDAQ:AMD) has amazed Wall Street with its reemergence as one of the hot stocks. Once known as the archrival of Intel Corporation (NASDAQ:INTC), AMD stock traded below $2 per share as late as 2015, as the PC market declined. However, the company has come back as a graphics chip company and now finds itself with a new archrival. This dichotomy makes the AMD stock buy-or-sell dilemma all the more interesting.

However, while investors are impressed with the company’s ability to compete, they are also frustrated by the company’s seeming inability to outcompete. Lower pricing and perception of inferior quality has remained with AMD for decades. Hence, evaluating AMD means looking at its positives and negatives and, from there, determining whether AMD stock stands as a worthwhile investment.

Pro — AMD Holds a Second-Place Status in Its Industry

As I mentioned in an earlier article, the legendary former CEO of General Electric Company (NYSE:GE) Jack Welch believed that winning companies ranked first or second in their industry. For most of its history, AMD held a second-place position behind Intel selling processors in the PC market. Though Intel holds its status as the world’s largest chipmaker to this day, AMD carved out a niche and offered an alternative to customers who did not want Intel processors.

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Today, AMD has emerged as the second-place player in graphics chips behind Nvidia Corporation (NASDAQ:NVDA). With the decline in PCs and the rise in artificial intelligence (AI) and virtual reality (VR), AMD switched its focus to graphics chips. AMD’s Radeon series graphics cards have proven themselves as a viable alternative.

Con — AMD Holds a Second-Place Status in Its Industry

The belief that AMD has lagged in quality has persisted through most of its history. Throughout the PC era, AMD was known for offering lower-cost processors. Despite the cost advantage, AMD was never able to threaten Intel’s market dominance. To AMD’s credit, it has closed most of that gap today. Unfortunately for AMD, PCs have become a less important part of the chip market.

Today, the focus lies more on graphics processors, and Nvidia has emerged as AMD’s primary and supposedly superior rival. Most would regard moving into second place as an impressive accomplishment in itself. However, the specter of second place still haunts AMD in this battle as well. In the contest over which graphics cards are the best, Nvidia wins in most categories.

Pro — AMD Stock Has Lower Valuations

AMD trades at a forward price-to-earnings (PE) ratio of 23. Market leader NVDA has fallen about 9% from its 52-week highs. Despite that, its forward PE stands at about 35. AMD also enjoys a slight edge in profit growth percentage. Still, profit growth for both companies is well into the double-digits, and AMD recently emerged from multiple years of losses, as it made its transition to a graphics chip company. Regarding which graphics chip company to buy, AMD stands as the better bargain.

Interestingly, AMD now commands a higher PE than its traditional archrival Intel Corp. Intel trades at a forward PE of about 13.6.

Con — AMD Stock Relies on Lower Pricing

One consequence of its second-place reputation relates to the requirement to attract business. Lower pricing has some advantages. Much of AMD’s lead in the cryptocurrency mining niche relates to a need for lower-cost processing power. Lower pricing also played a role in bringing PCs and graphics technologies to many who could not afford the higher-cost processors made by either Intel or Nvidia.

However, lower pricing also leads to lower gross margins. In the previous fiscal year, AMD saw gross margins of about 52%. Gross margins for NVDA came in at about 60%. I do not think AMD’s modestly lower gross margins bode poorly for the company. Still, I think they show why NVDA can command a higher valuation.

The Bottom Line on AMD Stock

Despite the similarities of pros and cons, I still fall on the pro side with AMD, namely because it has addressed most of its negatives. A few short years ago, prospects looked dim for AMD, as the decline in the PC market left little room for its processors. AMD reinvented itself and emerged as a leader in the graphics chip market.

While the secondplace reputation makes this company both impressive and frustrating, it has proven itself a formidable competitor to Nvidia. AMD’s competitive threat forces both companies to innovate faster and better, which benefits all of us in the end.

AMD’s slightly lower gross margins may disappoint some investors. However, with faster profit growth and a forward PE that’s about one-third lower than that of Nvidia, I would rather own AMD stock at this juncture.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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