Why Advanced Micro Devices Fell Hard on Tuesday
What happened
Advanced Micro Devices (NASDAQ: AMD) fell hard on Tuesday, down about 7% as of this writing, much greater than the overall market's decline today. There was no material news out of the company on Tuesday, so the problem likely had to do with macroeconomic factors.
On the one hand, recent sanctions on Russia will prevent advanced semiconductor sales to the country -- but that was announced on Monday. Compounding the uncertainty is spiking oil prices, which some fear may lead to an economic slowdown. Finally, the Federal Reserve is expected to hike interest rates this month, which could hurt high-multiple growth stocks like AMD.
So what
After the invasion, the U.S. Department of Commerce's Bureau of Industry and Security issued a ban on semiconductor sales to Russia. While that sounds dire, investors shouldn't necessarily fret. Russia only accounts for only around 2% of global PC and mobile phone shipments, along with about 1% of server shipments. One concern would be if the situation were to escalate with regard to China, which is attempting to maintain a neutral stance between the U.S. and its Communist ally. However, that escalation hasn't happened yet.
Additionally, oil prices spiked on Tuesday to over $104 per barrel. While you may not think that affects the semiconductor sector, an economic recession or slowdown brought on by high prices would. Traditionally, semiconductors have been thought of as a highly cyclical industry, with booms and busts and greater volatility in operating results than the overall economy. Some think we are in a newer era now in which semi sales become steadier than in the past, but the jury will be out until the next slowdown.
In addition, the Federal Reserve is expected to hike interest rates this month, which could put pressure on high-multiple stocks. AMD has achieved impressive revenue growth and market share gains in recent years against Intel, but that success has caused the stock to now trade at 45 times trailing earnings and around 29 times next year's earnings. That's on the high end for semiconductor stocks, and may make it difficult for AMD's stock to go up as interest rates rise.
Image source: Getty Images.
Now what
AMD has been a winner over the past few years as it leapt ahead of Intel in leading-edge chips and gained market share. It's still performing quite well, with last quarter's results trouncing analyst expectations for revenue and earnings.
Still, with its success now coming to fruition, some may be wondering if AMD's best growth numbers are behind it, and more investors will be looking at the bottom line, not just top-line growth. In addition, AMD just closed on its acquisition of Xilinx, a maker of programmable chips and accelerators, on Feb. 14, so company results will now be larger, but will look different from the past when AMD was gaining share in CPUs. Large companies generally have difficulty growing as fast as smaller ones.
Still, the importance of advanced semiconductors in accelerated computing, artificial intelligence, and connected devices is rapidly growing. Therefore, investors without a position may wish to look at AMD if it falls further. It's still a strong performer in the industry.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.
