Even though Advanced Micro Devices (NASDAQ:AMD) is up by over 50% year-to-date, its competitor in the graphics card space, Nvidia (NASDAQ:NVDA), is not far behind. NVDA stock rose 41%, largely because it has a comfortable lead over AMD on the mid-market and high-end GPU space. That lead is troubling for AMD shareholders, who rely on the CPU market for the company’s revenue growth in 2019. AMD needs a mid-market solution released soon. It can no longer afford to cede market share to Nvidia. So how does the launch of Navi — AMD’s latest GPU offering — impact AMD stock?
Navi is expected to come in three variants that may range in price from $129 – $249. If the rumored specifications are true, the Radeon 3060, 3070 and 3080 models would get 1MB more of L2 cache, more memory bandwidth and would rival its own Vega card.
If Navi cards are as good as the Vega 56, AMD’s GPU could at least compare to the GTX 1080 cards. The bad news is that the Vega 56 card is a slower performer, while the GTX 1080 has been on the market for a long time.
But the introduction of a slower Navi card is not necessarily a bad thing, as AMD could price its products below Nvidia’s budget cards, helping the company win market share.
GPU Segment Is a Drag on AMD Stock
AMD’s GPU division is a negative headwind for the company’s overall prospects. In its Q4 2018 report, the company acknowledged it faced near-term graphics weakness. Still, annual revenue grew 23% to $1.2 billion due to strong sales for Ryzen, EPYC and datacenter GPU products. Ryzen desktop, notebook processors and datacenter GPU sales offset weaker GPU sales. It is anyone’s guess when AMD will work through elevated graphics card inventory. Both AMD and Nvidia need to clear inventory levels before it may promote better products at a higher average selling price.
Once inventory drops, the company may reverse last quarter’s year-over-year GPU revenue decline. In the current quarter, the Radeon VII on the 7nm manufacturing process could help support the average selling price, but AMD has too much Polaris and Vega cards to sell first.
Setting Navi GPUs at $250 would kickstart a price war with Nvidia. But it would also accelerate market share growth for AMD, especially when Nvidia’s cost for its GPUs is $500 on average. In the gaming notebook segment, high-end configurations all use Nvidia GPU solutions. AMD needs a notebook Navi GPU solution, otherwise, its only revenue generator will be from console chip sales. And that’s not good enough to support the long-term case for AMD stock.
The bad news for both consumers and investors is that Navi getting priced at $250 is very unlikely. Historically, AMD has not released a competing GPU solution that undercuts Nvidia’s pricing. If anything, the GPU would come in at the same or at a higher price, consume more power and perform worse.
Another thing to consider is that high expectations from the technology community may hurt the company’s branding if Navi’s technical specifications are below par. If the GPU is based on GCN, the product will probably come in at a higher price. Plus, the rumored Arcturus architecture may potentially give the AMD product ray-tracing support in one form or another.
Bottom Line on Advanced Micro Devices Stock
Advanced Micro Devices stock trades at a forward price-to-earnings ratio of 29X. Nvidia’s forward P/E is 26X, so the two companies are similarly valued.
Accordingly, investors may want to wait for the official launch of Navi before committing more funds to AMD stock. Despite this author’s valuation concerns, Wall Street analysts think the stock trades at close to fair value. The average price target (according to Tipranks) on AMD stock is $29. The company may perform well in the CPU market but it still needs to grow and take market share in the GPU space.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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