To The Moon

Advanced Micro Devices, Inc ($AMD(AMD)$), based out of Santa Clara in California, is a lot like NVIDIA (which was covered last week) and is also a keenly-watched stock right now. Both companies design and sell processing hardware, although NVIDIA is more known for its range of high-performance GPUs while AMD's niche is the more-traditional CPU. While GPUs and CPUs, strictly speaking, are traditionally used together, recent practices involve scaling up computation performance via "chaining" GPUs more often than CPUs. 

Perhaps because of the more advanced technological application, NVIDIA tends to attract a higher conviction than AMD. However, AMD is no shrinking violet in investor interest. On account of their similarity in core business, both can be considered under the same framework. As it turns out, similarities with respect to NVIDIA run quite deep. 

Fiscal Trends

A quick rundown of the company's past two years’ Full Year results versus the first quarter of this year – as per the company’s calendar – reveals the first of these similarities:

Solid Line Item Discipline and Growth Until Q1

Beyond a ramping up in long-term debt, there are no particularly egregious differences in trend for either company. In fact, even AMD shows a corresponding decrease in diluted earnings per share, just like NVIDIA did. Similar to NVIDIA, it isn't really a major concern this early in the Financial Year. 

Ratio and Volume Analysis

From March of last year through this week, an analysis of the 3 ratios as carried in more recent articles, reveal the second of these similarities:

A Heavy Downward Trail in 2022

Note: Data services often don't report ratios that are too high or too low, since they're deemed to be meaningless in terms of actionable insight. Days of unreported ratios are represented by a blank here.

While the stock's Price to Book Values cannot be commented on due to its absence in most periods, the Price to Sales (PS) ratio indicate a fair bit of relative stability (albeit, a little more so in NVIDIA's case than AMD) while the Price to Earnings (PE) ratios shows a decline by nearly 58% in the past week. 

Lets consider what the PE Ratio effectively implies: lets say that the PE Ratio of a stock is 50 today. This means that investors are paying $50 for $1 in earnings attributable to them over the course of every future year. Now, this is extremely common in the case of new companies with interesting product propositions. The expectation is that the company's proposition will find substantial traction among buyers at the cost of older "legacy" propositions. This capture in market share in subsequent years should theoretically lead to higher attributable earnings (assuming no outsized increase in cost of sales and other expenses), thus justifying the high entry point today. In subsequent years, however, as the company's market share stabilizes, so does the PE Ratio. 

In practice, this has not happened: AMD is a stable company with a largely-solid market share that has seen some variation but not by a massive margin. On the other hand, NVIDIA arguably had a little bit of wriggle room since it touts transformative data center and AI applications promised in future products. 

Be that is it may, in either stock's case, there is always the argument if the PE Ratios should have been so high in the first place. Most Fortune 500 CFOs and top fund managers, including Berkshire Hathaway's Charlie Munger, had been voicing their concern that the U.S. equity market in particularly overvalued in numerous surveys over the past 4 years and "tech" accounted for a substantial chunk of this. 

In NVIDIA's case, whether the aforementioned transformative applications would find substantial adoption in the wake of an anticipated spending crunch due to rising costs is question that asks the question as whether a higher valuation of the stock (in PE terms) is justified. On the other hand, it could also be argued in real-world terms that a CPU purchase is relatively more "essential" than a GPU purchase, thus prospectively tilting the scale ever-so-slightly more tilted in favour of AMD. This tilt would be manifested if AMD's ratios were considered "rational" enough by market participant consensus, which doesn't seem to be the case right now. 

Lets consider traded volumes now relative to the market. As mentioned in the NVIDIA article, over the year till date (YTD), monthly average volumes have generally been trending down across the board after the customary "January bump". When comparing traded volumes in the stock versus the "tech-heavy" Nasdaq-100 (here represented by the ETF QQQ) normalized relative to volumes seen on the 3rd of January, we encounter the third point of similarity:

Correlations With a Slight Lag

Overall, while the volumes in the stock does tend to be correlated with volumes shifted in the broader ETF, AMD tends to show a little lag and even a slight degree of non-synchronicity on a number of occasions. This tendency, however, is relatively minor. 

In Conclusion

AMD, like NVIDIA, is a top-tier company that is well-led, has an excellent product offering that also shows their deep expertise and a stalwart market share. This is the fourth point of similarity. The final point of similarity is that overvaluation has divorced the company's performance from the stock's. 

Given these many points of similarity, the conclusion is largely the same: overvaluation comes with volatility on a downward-trending basis. In the months or quarters going forward, a series of price discovery actions on both the upside and downside around certain price levels should be expected.

Proponents of Dollar-Cost Averaging should bear in mind that this strategy typically pays off if prices continue to rise; there is, of course, no means of guaranteeing if trajectories will sustain an upward trend any time soon. During price discovery, however, there are plenty of opportunities for tactical investors in Asia who have access to Daily Leveraged Certificates (DLCs) and Exchange-Traded Products (ETPs) with daily-rebalanced inverse and leverage factors embedded to collect profits. For instance, as shown in an earlier article wherein Tesla's downward trajectory was monetized (and similar to NVIDIA), $3X AMD(AMD3.UK)$ and $LS -1X AMD(SAMD.UK)$ can be deployed to capitalize on the upside and the downside respectively.