AMD (NASDAQ:AMD) has surged higher by more than 60% year-to-date. The sharp rally in AMD stock has been triggered by new product launches and a healthy pipeline of exciting products. In addition, sustained improvement in gross margin has contributed to the upside.
I remain bullish on AMD for the long-term with the company making inroads in the cloud segment, artificial intelligence and augmented reality. However, I believe that the stock is likely to trend lower in the near to medium-term.
This article will discuss the key concerns that make me relatively bearish on Advanced Micro Devices stock.
Global Slowdown and Possible Recession
There are stocks that are relatively immune to a slowdown or recession. Typically, these stocks are in industries like healthcare, pharmaceuticals or other necessities.
However, Advanced Micro Devices is sensitive to an economic downturn. As the yield curve inverts in the United States and the United Kingdom, slowdown or recession is the first major concern for AMD stock.
Clearly, the global economy is slowing down sharply and this will impact the results for AMD in the coming quarters.
Any potential analyst downgrade in terms of revenue or EPS will result in the stock trending lower and I expect that to happen.
Trade War with China
The ongoing trade war between the United States and China is showing no signs of de-escalation.
I believe that trade war will continue to impact AMD stock with the company having approximately 30% business from China.
As an example, Advanced Micro Devices sales were impacted because it could not sell chips to Huawei in the previous quarter. While Donald Trump has announced that Huawei can buy from U.S. suppliers again, the uncertainty amidst trade war sustains.
Another negative implication is that AMD might need to increase prices or take a hit on margins if chips produced in China are imported to the United States for sale. Analysts are already worried about the tariffs and the coming quarters will provide clarity on the impact.
It is estimated that by 2023, there will be 354 million PC gamers in China. This is more than the population of the United States. This presents a big growth opportunity for companies like AMD and Nvidia (NASDAQ:NVDA).
However, it remains to be seen if these companies can withstand the impact of the trade war and grow amidst uncertainties.
Nvidia has an Edge over AMD
If I had to choose between Advanced Micro Devices stock and Nvidia, I would prefer to invest in the latter.
Nvidia reported strong second-quarter results and the stock is already higher by 7% as I write. In particular, the company’s gaming segment strength is noticeable.
If we also look at the video card market share, Nvidia is a clear leader with a 60.23% market share. AMD is a distant second with a market share of 23.03%.
With Nvidia having a relatively expensive product offering, the market share trend is an indication of the fact that consumers prefer high performance over price.
It is true that AMD is looking at introducing some high-end models in the coming years. This is likely to heat-up the pricing war between the rivals. However, Nvidia has a clear edge now and the stock is likely to sustain the upside after second-quarter results.
Final Words on AMD Stock
There is no doubt that AMD has exciting prospects in the coming years. The company has also reduced its balance sheet stress with leverage declining from 4.6 in 4Q17 to 1.9 in 2Q19. However, economic headwinds, trade war and competition with Nvidia in the gaming segment are likely to hurt AMD stock in the near-term.
In the medium to long-term, the company has the advantage of out-performance in the CPU and server market. Additionally, the company’s high-end GPU launch can be a potential game-changer in terms of market share.
Considering the fact that AMD stock price has surged by more than 60% YTD, I would advise investors to wait for some correction. A decline of 15% to 20% from current levels is likely considering economic and trade war headwinds.
As of this writing, the author did not hold a position in any of the aforementioned securities.
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