Interesting Risk/Reward in the chip space: Advanced Micro Devices

  • The stock is one of great turn around stories of 2016–17.
  • The stock has quadrupled over the past year, and is has an interesting risk/reward situation.
  • With the growth in the chip space as well as M&A this would be a good target for Micron.

The chip industrial sector has been in a great bull market since 2012. The sector has growth over 120% over the last five years. The VanEck Vectors Semiconductor ETF has returned more than 40% over the past year.

Within that ETF there are some gems like Nvidia which has grown over 200% and defensive old legacy names like Intel and Qualcomm with lots of cash. Intel recently acquired MobileEye for over $15 billion dollars. While Qualcomm acquired NXPI Semiconductors N.V for $47 billion. These are all strategic moves as these legacy names are looking to the Internet of things space as well as the driverless car space. The driverless car industry is going to demand a lot of chips from this space. Also the cloud computing space as well as robots & AI are potential growth areas that will keep the chip space demand high. The PC business is still providing funds for the dividends and M&A.

Advanced Micro Devices (AMD) is a stock that has come back from the dead as they reinvent themselves. This stock was left for dead at $2.60/share but now it’s at $14.55/share. The company has turned to gaming and consoles as they steal some market share from Nvidia. Their new chips, Ryzen 5 will help shore up cash for AMD as they grow gaming. The company can also be acquired by Micron who are also on a great run. They are growing revenues at 48% a year and adding AMD will be additive to their growth.

Looking at the financials, management has cleaned up the balance sheet and earnings are starting to grow again. The company had 2016 revenue of $4.29 billion up from $3.99 billion in 2015.

So for me with all these catalysts and possibilities I like AMD at these levels. If they miss next earnings I will add to my position because there is a secular trend starting in the chip space. AMD doesn’t need Trump policies immediately to keep on growing. To protect my downside risk I am long NXPI which was acquired by Qualcomm for $110 and I am guaranteed my 10 plus percent when the deal closes.

Disclosure: Cresco Investments Fund has positions in AMD and NXPI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor

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