tiprankstipranks
Semiconductor Shortage Shouldn’t Bother AMD Stock
Stock Analysis & Ideas

Semiconductor Shortage Shouldn’t Bother AMD Stock

Advanced Micro Devices, Inc. (AMD) is among the world’s biggest and well-known chipmakers. I am bullish on AMD stock.

As soon as one problem subsides, another takes its place. That seems to be the case with AMD, as the recovery from the COVID-19 pandemic was followed up by a global semiconductor shortage.

In a high-inflation environment where there seems to be an undersupply of everything, the last thing that the world needs now — and the last thing AMD stockholders need now — is a chip-supply deficit.

Yet, the fear over this issue may be overstated. Besides, the strength in AMD stock is undeniable and the company itself is doing quite well financially. (See AMD stock charts on TipRanks)

A Quick Look at AMD Stock

AMD is a textbook example of a breakout stock. For most of the past 12 months, the stock was stuck in a range of between $75 and $95.

It was a frustrating, drawn-out tug-of-war between the buyers and the sellers. Yet, the breakthrough moment finally happened in the summer.

The rocket ride started in July and kept going into August, with AMD stock topping out at a 52-week high of $122.49 on August 4.

There was a pullback after that run-up, as AMD finished trading Monday at $108.77. Nonetheless, the stock is above its previous range, so $95 should serve as a support level for the time being.

Meanwhile, AMD stock has a trailing 12-month price-to-earnings ratio of 37.1, which isn’t super-cheap but also isn’t terribly pricey for a technology stock nowadays.

Assessing the Microchip Shortage

There’s no denying that the global microchip supply shortage is causing issues.

Alarmingly, research by Susquehanna Financial Group revealed that “the gap between ordering a semiconductor and taking delivery has increased by [eight] days from the previous month.”

Not only that, but the automotive industry is expected to lose roughly $100 billion due to sales it couldn’t make because of the semiconductor shortage.

On the other hand, Advanced Micro Devices isn’t an automaker. Rather, the company sells to automakers, smartphone manufacturers, and many other types of businesses.

Therefore, we might say that AMD stock is a pick-and-shovel type of investment. This means that the company sells something that a range of other businesses can’t do without.

If worse comes to worst, AMD could raise its prices in order to fill the gap. In all likelihood, the company’s competitors would do the same thing.

Don’t Worry, Stay in the Trade

If any company can withstand the current chip shortage, it’s Advanced Micro Devices.

This is a massive business, with a market capitalization of $131.9 billion. Advanced Micro Devices survived the bursting of the dot-com bubble in 2000, and the financial crisis of 2008.

So, when it comes to the semiconductor shortage, investors should remember the old saying: this, too, shall pass.

Plus, there’s probably going to be budgetary support from the U.S. government. On June 8, the U.S. Senate passed a bill that would allocate $52 billion to boost semiconductor production, as well as research and development activities over the next five years.

In addition, investors should keep in mind that Advanced Micro Devices is in terrific financial condition. For 2021’s second quarter, the company reported revenues of $3.85 billion, representing a 99% year-over-year increase. Furthermore, AMD’s quarterly gross margin was 48%, indicating a 4% year-over-year improvement.

Wall Street Weighs In

According to TipRanks’ analyst rating consensus, AMD is a Moderate Buy, based on 12 Buys, three Holds, and one Sell. The average AMD price target is $111.73, implying 2.7% upside potential.

Takeaways

One way to react to the global microchip shortage is to panic-sell any AMD shares you might have, or just avoid the stock altogether.

However, you might instead choose to remain calm and understand that this situation will pass, sooner or later.

If there’s any chipmaker that’s build to withstand challenging times like this, it’s Advanced Micro Devices. Therefore, it’s perfectly sensible to stay the course with AMD stock.

Disclosure: At the time of publication, David Moadel did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles