Advanced Micro Devices (AMD) and Micron Technologies (MU) are in the same business. Both make memory for computer devices. It is a highly cyclical business in two ways. Firstly, they supply parts for consumer discretionary products, so demand fluctuates with global economic conditions. Secondly, the memory that they supply is commoditized, leaving them at the mercy of the market when it comes to pricing. It would be logical to expect the two stocks to move together to some extent.
As you can see from the 5 year charts above, this was the case until about a year ago, when they started to diverge. This is even more obvious on a 1 year chart.
If, like me, you believe that the recovery is still in place, with global growth set to continue grinding higher, then an investment in a chip maker makes sense; the question is “which one?”
At first glance the contrarian in me is inclined towards AMD; there would appear to be more upside potential given the recent drop in price, but buyers of MU have been evident for a reason. Micron’s acquisition of the bankrupt Japanese semi-conductor company Elpida looks set to complete in the near future. The deadline for any legal challenge has passed, and management declared themselves to be “optimistic” that the deal will be finalized during this quarter.
With the price of memory rising and demand gradually returning, this is beginning to look like a smart deal. It will make MU second only to Samsung in the memory market. Even without the greater capacity and sales that the Elpida acquisition will bring, Micron returned to profitability in the last quarter, reporting Earnings Per Share (EPS) of $0.04 on revenue of $2.318 Billion in June.
AMD, on the other hand, reported a loss of $0.09 per share last week. This beat expectations of a $0.12 loss and management gave an upbeat forecast, but the stock was hit hard and is down around 20% from the high on July 18th, the day of the release. It seems that investors just don’t believe that rosy forecast.
I have said before that perception is important, and it definitely seems to be here. AMD is considered to be closely tied to the PC market; they are best known for CPUs and graphics cards. The reason for the upbeat forecast on the earnings call was tied to their products being in several of the new generation game consoles due for release, but continued weakness in the PC market still hurts the perception of their prospects.
On balance, I believe that MU will continue to outperform AMD over the coming months. The mobile revolution is, in my opinion likely to hurt sales of the new generation of game consoles as well as PCs. People are accustomed to doing everything from a handheld platform, including gaming. For the hardcore gamer the new consoles will be a must, but I don’t believe they will generate big sales to average families. There are just too many alternatives now available.
Add to this the simple metric of execution. The fact remains that in a still difficult market, Micron has returned to profitability and AMD has not. Assuming that the Elpida acquisition is approved, MU looks better positioned to continue making money from their core business, while AMD’s CPUs and the continued competition with Intel (INTC) will continue to weigh on results.
Sometimes I have to control my tendency to look for the contrarian play. When comparing these two companies, both in the same sector, I will resist the temptation to recommend the stock under pressure and go with the company that has a proven ability to make money in the current environment and has growth potential. You may disagree; if so feel free to tell me why in the comments section below.