My esteemed InvestorPlace colleague, James Brumley, recently discussed Advanced Micro Devices (NASDAQ:¶¶Ņõ×īŠĀ°ę), suggesting that “¶¶Ņõ×īŠĀ°ę’s Microsoft (NASDAQ:MSFT) partnership looks like a big win for the chipmaker and should boost ¶¶Ņõ×īŠĀ°ę stock over the longer term.”
Clearly, the fact that Microsoft is venturing out to other suppliers beyond Intel (NASDAQ:INTC), is good news for Lisa Su and the rest of the ¶¶Ņõ×īŠĀ°ę management team.
And while I have oodles of respect for what Su’s accomplished over the past five years in the top job, like everyone on this planet, she’s expendable.
It’s Not the Time to Buy
The August rumors (unfounded) Su was bolting for IBM (NYSE:IBM) caused a stir for a short time, but ultimately it was the uncertainty facing ¶¶Ņõ×īŠĀ°ę and the rest of the semiconductor industry that brought Advanced Micro Devices stock back into the $20s, down from its 52-week high of $35.55 reached in early August.
While the partnership with Microsoft has been good for ¶¶Ņõ×īŠĀ°ę’s reputation, InvestorPlace’s Laura Hoy, who’s ranked , believes investors ought to wait until ¶¶Ņõ×īŠĀ°ę stock falls below $27 to buy.
Given her remarkably consistent TipRanks rating, I’d take her recommendation seriously and wait.
In mid-September, I suggested that investors wait until the mid-$20s to buy. I don’t believe anything, including the Microsoft partnership, has done anything to change my opinion about ¶¶Ņõ×īŠĀ°ę stock.
Until insiders start buying, it’s overpriced.
However, if you’re in the same camp as my colleague and believe that the Microsoft partnership is going to create dividends for ¶¶Ņõ×īŠĀ°ę for years to come, I’d think again.
Microsoft is the winner of this partnership. Here’s why.
A Small Portion of Its Business
As Brumley stated, Microsoft is still going to offer a Surface Laptop 3 with an Intel CPU to go with an ¶¶Ņõ×īŠĀ°ę version, which means ¶¶Ņõ×īŠĀ°ę isn’t going to reap as much from this move as one might think.
In fiscal 2019, the , 23% higher than a year earlier. Almost 100% of this revenue came from Intel-powered laptops. That will obviously change in fiscal 2020. However, it still won’t represent a big chunk of revenue for ¶¶Ņõ×īŠĀ°ę.
“If the Surface Laptop 3 proves to be a hit, it could change from lagging Intel in the high-performance CPU segment. This could encourage other laptop OEMs (original equipment manufacturers) like Dell, Lenovo, and even Apple to consider ¶¶Ņõ×īŠĀ°ę Ryzen for their flagship products,” stated Market Realist contributor Puja Tayal recently.
If, if, if.
As Tayal suggested, this win for ¶¶Ņõ×īŠĀ°ę has everything to do about street cred and little to do with volume or revenue. After all, the Surface laptops accounted for just 3.8% of Microsoft’s $125.8 billion in 2019 revenue.
Microsoft could easily abandon hardware and not miss a beat, although it probably won’t, because it gives itself a proprietary product to experiment with Windows, Office, etc.
But don’t think Microsoft is about to create a gravy train for ¶¶Ņõ×īŠĀ°ę.
The Bottom Line on ¶¶Ņõ×īŠĀ°ę Stock
I don’t think there’s any doubt that Advanced Micro Devices is a much better company than it was five years ago.
To get to $40, however, ¶¶Ņõ×īŠĀ°ę is going to have to generate positive free cash flow on a consistent basis, something it’s failed to do up to this point in its transformation.
Thus, while it sounds good to say ¶¶Ņõ×īŠĀ°ę’s got a Ryzen CPU in one of Microsoft’s flagship laptops, it won’t amount to a hill of beans if it can’t put them into other OEM flagship products.
In the meantime, Microsoft gets to pit one supplier against another. May the best company win.
To me, the winner of the ¶¶Ņõ×īŠĀ°ę/Microsoft partnership is… Microsoft!
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
