Stocks in the tech industry have always been fairly temperamental. Where other industries tend to boast some form of consistency and predictability, the semiconductor sector has to contend with the fact that software, particularly where AI is concerned, plays just as much a role in defining public perception of hardware as the actual hardware does.
The current drop in price has nothing to do with AMD’s associated software, but instead, re-evaluations surrounding their ability to pull profits in the current market that justify their high P/E ratio. AMD has dropped roughly 17% in the last month as of April 22nd, 2024. The CPU/GPU manufacturer is a highly prized piece of public business, with a P/E ratio of 283 and a market cap of $240B.
The defining reality of AMD’s nature as a publicly traded company is that its volatility is mostly defined by fears related to its ability to carry its current performance into the future, and if the high price-to-earnings ratio it currently has will ultimately be overcorrected for in the future, leading to a smaller, more pragmatic market capitalization.
When paired next to their closest competitor in the GPU market, NVIDIA, the uncertainty surrounding AMD’s current pricing in the market begins to make obvious sense. NVIDIA currently boasts a profit margin over five times greater than AMD and has a P/E ratio of about 68.
Where CPUs are concerned, most consumers have to choose between AMD, Intel, or a SoC improvised by Apple. But with GPUs, the vast majority of non-APU users will be opting for NVIDIA, with a much smaller, often more PC-experienced user base opting for AMD or Intel’s lineup. That is to say that, despite AMD’s very competitive lineup of GPUs, the general consumer base isn’t yet convinced, leaving the company leaning rather heavily on its CPUs.
This, combined with the fact that AMD still doesn’t show signs of wanting to produce their own chips, instead outsourcing them, primarily, to TSMC, means that AMD should still be analyzed with a healthy amount of doubt surrounding their ability to maintain their market cap in any realistic way. Their biggest CPU competitor in Intel, by contrast, just assembled their first of the world’s most advanced EUV lithography system and plans on using in-house production for their chip fabrication, ultimately untethering them to TSMC in the same way AMD is tied to the Taiwanese company.
TLDR; The current fervor around AMD’s stock and its dropped price this month is, decidedly, one that has pulled bullish and bearish investors alike to the forefront with, among conservative approaches, suggestions of the stock being a discounted buy during the current reassessment. Whether or not the company can actually maintain its very high price-to-earnings ratio among its cutthroat competitors remains to be seen.
