If you are looking to invest in Advanced Micro Devices Inc’s (NASDAQ:AMD), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. AMD is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
An interpretation of AMD’s beta
With a beta of 2.83, Advanced Micro Devices is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, AMD may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does AMD’s size and industry impact its risk?
With a market capitalisation of US$9.73B, AMD is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Conversely, the company operates in the semiconductor industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of AMD, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests AMD should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can AMD’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test AMD’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since AMD’s fixed assets are only 28.25% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts AMD’s current beta value which indicates an above-average volatility.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto AMD. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether AMD is a good investment for you, we also need to consider important company-specific fundamentals such as Advanced Micro Devices’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for AMD’s future growth? Take a look at our free research report of analyst consensus for AMD’s outlook.
- Past Track Record: Has AMD been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AMD’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.