With Advanced Micro Devices‘ (NASDAQ:AMD) competition getting steeper on multiple fronts and the valuation of AMD stock rather elevated, I recommend selling the shares at this point. Also likely to weigh on the stock going forward are China’s harsh restrictions on the use of its chips. Finally, there are multiple signs that the Street is becoming significantly less enamored with the name. Given these points, I recommend that investors sell AMD stock at this point.
Tougher Competition From Intel
There are indications that AMD’s days of taking large amounts of market share from Intel (NASDAQ:INTC), at least in the PC market, are over.
According to well-regarded tech research firm Canalys, the shipments of laptop and desktop PCs with Intel’s chips increased 3% year-over-year in the fourth quarter. Those using AMD’s semiconductors fell 1% year-over-year. Similarly, in the mobile CPU sector, which includes the large laptop market, AMD’s share fell to 19.3% last quarter. That’s down from 20.3% in Q4, according to Mercury Research.
And although Mercury notes AMD gained share in the smaller server and desktop markets in Q1, its share of the total chip sector came in at 20%. That is meaningfully below the peak of about 24% that it reached in Q2 of 2022.
Typically tech websites comparing AMD’s chips to Intel’s usually give the nod to AMD. But interestingly, the only website actually evaluating whether PCs with Intel chips are better than PCs with AMD’s processors came out squarely in favor of Intel. Specifically, in an Apr. 15 report, Windows Central named the top AI PCs in six different categories. Five out of the six winners utilize Intel’s chips. And of course, most consumers and businesses buy PCs with chips in them, rather than buying chips separately and installing them into PCs.
Intel CEO Pat Gelsinger also said last month that its customers keep asking for more of its AI PCs chips and it is “racing to catch up” with their orders. I believe this news indicates Intel’s share of the AI PC market is much bigger than its share of the conventional PC market. If my hypothesis is correct, AMD’s overall PC chip sales will probably take a big hit over the longer term.
Big Cloud Competition and China Worries
Many investors and stock pundits are expecting AMD’s AI GPU chip, the MI300, to generate large, rapidly growing revenue and profits for the firm. But AMD has to take on Nvidia‘s (NASDAQ:NVDA) top-notch AI chips and Intel’s upcoming Gaudi 3 AI chip which reportedly offers good value for the money. And AMD now has to also compete with a few of the large cloud players that are starting to launch their own AI chip. Specifically, Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) are all in the latter category.
Meanwhile, AMD’s revenue from China is likely to take a big hit over the longer term, as Beijing gave its telecom companies until 2027 to stop using chips made by both Intel and AMD. The Chinese government also intends to stop using the American companies’ chips. According to The Wall Street Journal, 15% of AMD’s sales were derived from China last year.
On the valuation front, AMD has a high forward price-to-earnings ratio of 43.9 times and an even more elevated enterprise value-to-EBITDA ratio of 59 times.
The Street Could Be Falling Out of Love With AMD
There are multiple indications that the Street is becoming less enamored with the name. First, the shares are down about 28% since peaking on Mar. 7, and they have fallen about 4% since AMD reported Q1 results that were roughly in line with analysts’ average outlook. Secondly, several banks have cut their price target on the shares in recent weeks. For example, on April 29, Susquehanna cut its price target on AMD stock to $185, citing weakness in the PC market. And Mizuho trimmed its price target to $215 in the wake of the company’s Q1 report. However, both banks kept “buy” ratings on the shares.
Finally, AMD has a dismal E Accumulation/Distribution rating from Investor’s Business Daily, suggesting that institutional investors have not been accumulating many of the shares in the last 13 weeks.
On the date of publication, Larry Ramer held long positions in INTC and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.