Barrons : AMD Is a Distant No. 2 to Nvidia. Its Stock Could Be a Winner Anyway.

AMD Is a Distant No. 2 to Nvidia. Its Stock Could Be a Winner Anyway.
The company’s new AI chip looks like a runaway hit. Why the shares might resume their long-term rise.

Advanced Micro Devices has always been a bridesmaid, never a bride. That’s not a problem for the stock, even as it trails market leader Nvidia in artificial intelligence.

AMD stock, up more than 500% over the past five years, has dropped some 20% since peaking on March 7. What began as a simple decline as the market pulled back following a hot start to 2024 morphed into something more worrisome as quarterly earnings beat by just a penny and guidance was left unchanged. AMD didn’t seem to be making enough progress in AI against Nvidia to make up for weakness in other areas, like videogaming and auto chips.

Investors needn’t worry. AMD’s gaming and industrial businesses should stabilize, and demand for chips in data centers should grow as companies diversify from Nvidia, even if only a little. In effect, AMD remains in the same position it was when Intel dominated chip sales.

“This is the Pepsi and Coke of the semiconductor industry,” says Rhys Williams, chief investment officer at Wayve Capital Management, which owns AMD. Tech, he adds, needs a second source to Nvidia to ensure chips are always available at good prices.

The upshot: AMD stock could remain on its long-term trajectory—it has climbed more than 1,000% in 20 years. That’s not Nvidia’s 53,000% gain, but it’s hardly shabby.

The case for the stock starts with stabilization of its industrial and gaming businesses. Though less glitzy than AI, the segments represented half of AMD’s business in 2023.

AMD’s industrial revenue, which includes sales to auto makers, other manufacturers, and communications companies, looks close to bottoming. It was $846 million in the first quarter, but analysts expect it to move higher this year to some $1.1 billion in the fourth quarter, representing a modest year-over-year gain. The field has been plagued by oversupply for the past few years, which AMD and its rivals are now working off.

Certainly, Analog Devices’ results this past week bode well for the industrial segment. For its fiscal second quarter, Analog Devices reported industrial sales of more than $1 billion, versus estimates of $953. The beat helped lift the stock more than 10% on Wednesday.

A rebound in gaming sales may be more gradual. Analysts see gaming revenue down this year, but up a few hundred million dollars next year to $3.37 billion. The keys are the health of consumers and new games like Take-Two Interactive Software’s Grand Theft Auto VI, expected next year, firing up consumers to buy consoles.

These rebounds would put the focus on AMD’s data-center business, which includes the new AI chip, MI300. Sales of MI300 haven’t ramped as quickly as expected, but it’s starting to get up to speed. Management projected 2024 sales of $3.5 billion on its January earnings call, then raised that to $4 billion in late April, citing strengthening demand.

In fact, the MI300 has become AMD’s fastest chip launch ever. In April, CEO Lisa Su said MI300 surpassed $1 billion in sales in less than two quarters after launching in December. Su and other AMD executives weren’t available for comment for this article

The demand is coming from Meta Platforms, Microsoft, Alphabet, and other chip customers as they build out data-center capacity to support AI. They need chips immediately, and they want to limit costs, which means buying from multiple vendors, playing into AMDs hands.

AMD’s sales to data centers should hit $12.2 billion in 2024, nearly double last year, according to FactSet’s analyst estimates. That looks doable, given it isn’t even 15% of Nvidia’s expected $94 billion in data-center sales. As AMD improves production and effectiveness of MI300, a common process for the early stages of new chips, its price should close the gap with Nvidia.

Analysts expect AMD to notch 35% data-center revenue growth annually, reaching more than $30 billion by 2027. That’s faster than projections for total AI spending—Gartner sees 20% annual increases over roughly the same span—and Nvidia’s expected data-center growth. But such speed isn’t surprising—AMD is playing catch-up.

AMD’s total revenue is on track to hit $47 billion, with operating margins expanding by more than 10 percentage points, according to FactSet. Not only do data-center chips have higher margins—and are faster growing—but total chip volume sold is expected to increase faster than costs such as salaries and research and development.

As a result, earnings per share can increase almost 40% annually, from $2.65 last year to $10 in 2027. The shares aren’t cheap: They change hands at 38 times expected earnings for the next 12 months, a few points higher than Nvidia’s multiple. But by another measure, the multiple is reasonable: It’s less than one times expected earnings growth, while the S&P 500’s price/earnings ratio is twice expected earnings growth.

The point is that AMD can play second fiddle to Nvidia and still be a great deal for investors, just as it was when it was chasing Intel. Being No. 2 can have its rewards.

Barrons : China’s Cheap EVs Aren’t a Threat to Tesla, Ford, and GM. Here’s What

China’s Cheap EVs Aren’t a Threat to Tesla, Ford, and GM. Here’s What Is.
U.S. auto makers have a fighting chance against a flood of inexpensive cars from China. But better vehicles might pose a problem.

BYD’s Seagull doesn’t look all that threatening. It’s a cute little four-door hatchback that’s three feet shorter than Tesla ’s Model Y. With its bright yellow paint job, the Seagull looks a little like a Minion from the back, even if it looks a tad grumpy from the front. It also comes with an adorable price—just $10,000.

But the Seagull and cars like it are apparently so frightening that the Biden administration raised tariffs on Chinese electric vehicles lest the cheap automobiles crush the U.S. auto industry. A 100% import penalty will be placed on EVs like the hot-selling BYD Seagull, or the GAC AION S, while select batteries and battery components will be hit with a 25% levy. Donald Trump, not to be left out, pledged even higher tariffs. The penalties effectively block Chinese companies from bringing their cars to America and prompt U.S. auto makers to invest in domestic EV component manufacturers.

That U.S. auto makers need protection has been widely accepted as fact—memories of the devastation caused by Japanese companies in the 1980s are still fresh, if a little skewed, despite 40 years of distance—and there is good reason to fear the Chinese auto makers. China is now the largest market for new cars and EVs, and it’s also the largest exporter of cars. Even U.S. auto executives, including Tesla CEO Elon Musk, extol Chinese automotive quality and innovation. Cheap vehicles, though, pose no threat to the U.S. manufacturers—it’s better cars they need to worry about. And those cars will be coming even if tariffs delay them for a while. American auto makers must use the time to design and build affordable electric vehicles or risk seeing history repeat itself.

“You’re putting a wall around yourself,” says Pablo Di Si, CEO of Volkswagen Group of America, of the penalties. “These public policies are good for a maximum 10 years.”

There is nothing surprising about the ability of Chinese auto makers to produce cheap cars. BYD can produce a $10,000 vehicle because it makes its own batteries, has eliminated luxuries such as a “frunk” and a rear wiper, and includes just one wiper in front. None of this is particularly innovative. They’re simply choices made to keep costs down to meet market expectations. “There is nothing magic,” says BofA Securities analyst John Murphy. “A stripped-down, small [vehicle] in the U.S. is not what anybody wants.”

The Chinese market can support more expensive cars, too. A Tesla Model Y starts at $35,000 in China and is the country’s best-selling EV. The higher price is partly due to its size—it’s 50% bigger than a Seagull, and requires more steel, plastic, copper, and other materials—and partly due to the much larger battery pack and more powerful electric motor that are needed because it’s a bigger, luxury car. The Model Y does cost $10,000 less in China than in the U.S. or Europe due to differing safety standards and labor costs. Ultimately, making cars in China is just cheaper, but that cost doesn’t translate overseas.

There’s nothing keeping American auto makers from building similarly cheap cars. General Motors has one of the better-selling EVs on the Chinese market, the Hongguang, which has sold about 130,000 units over the past 12 months and costs roughly $5,000. It has two doors, a range of 75 miles, and a top speed of about 60 miles an hour. It’s 115 inches long—about half the length of a full-size truck and about five feet shorter than a Toyota Corolla. It makes the Seagull look like a luxury vehicle.

Freedom Capital Markets analyst Mike Ward compares China’s cheap cars to the Yugo, the $4,000 Yugoslavian subcompact car that was all the rage in the U.S. for about five minutes in the mid-1980s. The Yugo sold about 150,000 units from 1985 to 1992, while capturing about 0.1% of the U.S. market. It was cheap but was also dissed by reviewers as one of the worst cars in America. Though China’s cheap cars are of higher quality, they’re made for the Chinese market.

“They’re not going to sell [in the U.S.],” says Ward.

The cheap cars also have an unfortunate side effect—Chinese auto makers are less profitable than their U.S. and European counterparts. While GM, Ford Motor, and Tesla posted average operating margins of 7% during the first quarter, BYD earned just 4%, while NIO, XPeng, and Zhejiang Leapmotor Technology lost money. “I know everyone is concerned about China competitors,” says Baron Capital portfolio manager David Baron. “The Chinese OEMs don’t make money…every car they sell is at a loss.”

Even Toyota Motor, one of the world’s most profitable auto makers, didn’t find success in the U.S. selling a cheap vehicle. The company started selling cars in America in 1958 with the Toyopet sedan, which sold for less than $2,000 and came equipped with a four-cylinder engine generating about 60 horsepower. It flopped. Early failure didn’t dissuade the Japanese auto maker. It built out its dealership network, and the Corolla, introduced in 1968, became a hit, but even then it took another two decades for Toyota to capture 6% of the U.S. market. It was only in 2000 that Toyota’s market share exploded as lower labor costs, the incumbent’s willingness to shift to trucks and sport-utility vehicles, and kaizen —the Japanese word for continuous improvement—helped the company become an equal player with GM.

Of all the Chinese EV makers, BYD has the best chance of becoming the next Toyota in the U.S. It’s growing fast—the company sold three million vehicles in 2023, up fivefold compared with 2021—and even sold more battery electric vehicles, or BEVs, than Tesla in the fourth quarter, the first time an auto maker in China had topped it. BYD also has a full lineup of cars, including plug-in hybrids, which range from the low-end Seagull to the $150,000 Yangwang U8, for Range Rover or Mercedes G Wagon buyers looking to go electric. The average price for a vehicle was roughly $22,000.

BYD is looking abroad, but low-cost cars should remain a Chinese phenomenon. The version of the Seagull sold in Brazil and Mexico starts at about $23,000 and $24,000, respectively, and BYD acknowledges that the Seagull will cost about 20,000 euros ($21,642) in Europe to meet the continent’s standards. “We have dozens of models in China. Not all of them are suitable for the European market,” said BYD Managing Director for Europe Michael Shu at a Financial Times conference on May 9.

That isn’t stopping BYD. It exports more than 10% of its volume, mainly in Southeast Asia. About 25,000 vehicles ended up in Europe during the 12 months ended on March 31, with Germany receiving just under 5,000 cars, the most of any single country on the continent. BYD’s goal is to have the leading electrified market share by the end of the decade—which could mean as much as 15% of all-electric or plug-in hybrid cars sold—an incredibly lofty goal considering it accounts for 0.7% of electrified sales in Germany today. Reaching it will require local capacity: BYD is building a plant in Hungary, while looking for a second location.

Chinese auto makers aren’t interested in the U.S. just yet—and not just because of the tariffs. There are no Chinese-branded cars sold in America and only one Chinese car plant in Mexico, owned by JAC Motors. For now, the strategy appears to come down to one word—someday. “North America isn’t a top consideration, given the tariffs, unstable policy environment, sluggish demand, and different consumer preferences,” says BNEF analyst Siyi Mi.

They aren’t ignoring it completely, however. While building capacity and distribution is the tried-and-true, though relatively slow, way to build a U.S. auto business, others will use backdoors to enter the U.S. market. Some brands, including Volvo, are owned by the Chinese. Polestar Automotive and Lotus Technology EVs are built by Geely in China and shipped to the U.S., paying a tariff along the way. Polestar plans to start manufacturing its Polestar 3 at a new facility in South Carolina later this year.

Investors will also start to see partnerships between the West and East. In 2023, Stellantis announced a $1.6 billion investment in Chinese EV maker Leapmotor. The deal included the formation of a joint venture for the “export and sale, as well as manufacturing, of Leapmotor products outside greater China.” Stellantis will own 51% of the venture, which means that a Leapmotor BEV could one day arrive at a local Jeep dealership near you.

The silver lining for GM, Ford, and Chrysler parent Stellantis is that China is unlikely to derail the U.S. industry the way Japan did in the 1970s and 1980s. For one, the U.S. auto industry is far more fragmented today than it was back then. In 1980, Detroit’s Big Three held 75% of the market. Today, they hold closer to 40%. Much of that share is concentrated in larger light-duty trucks that don’t lend themselves to rapid electrification. Electric vehicles are also different from traditional cars in another important way—the batteries cost roughly twice as much as labor in an EV. So, cheap batteries, and not cheap labor, can become the defining competitive advantage in smaller, less expensive automobiles.

That gives Ford, GM, and Chrysler a fighting chance. They don’t have to cede share to foreign auto makers for a second time. Ford seems to realize this and is investing heavily in next-generation EVs at its secretive “skunk works,” a now-generic term for secretive new product development taken from defense giant Lockheed Martin. The new EVs should include smaller SUVs and trucks. All investors really know is that profit margins are expected to rival traditional vehicles, which means Ford is focused on lowering the cost of the product.

GM, with the Wuling Hongguang mini EV, understands the Chinese EV business better than most. But in the U.S., GM pins its hopes on company-controlled battery production and its modular Ultium EV battery technology platform. It’s making progress in offering lower-priced BEVs, including the all-electric Chevy Equinox, which launches later this year and starts at $35,000. (The traditional Equinox starts at about $27,000 and is one of the better-selling cars in the U.S. with 2023 sales of 212,701 units.) The next-generation Chevy Bolt is due in 2025. It’s also possible that GM might not need to get a sedan right to succeed in the U.S. as long as it can remain dominant in SUVs and pickups.

“The question is how rough is Chinese competition in those areas,” says Bill Nygren, a portfolio manager at Oakmark funds. “[In theory,] GM and Ford can live very comfortably with a passenger car market dominated by Chinese imports.”

Tesla has the most to lose. While GM and Ford need to reduce costs and introduce EVs that their traditional buyers will try, Tesla needs to move faster. It slow-played its lower-priced electric vehicle, taking its time to fully implement new manufacturing practices designed to cut the total cost to build the car by 50% relative to a Model 3. That meant producing an EV in North America for a cost of close to $17,000. Then, EV growth collapsed, partly because there were few cheap EVs for Americans to buy. Tesla, in response, is accelerating the development of its lower-price car that investors call the Model 2. Accelerating production means the car will cost a little more, but could be on the road by early 2025.

Wedbush analyst Dan Ives called the decision a smart strategic move and believes that Tesla will be a leader in the lower-end segment. Now, Tesla needs to hit its timelines. That hasn’t been easy for the company. Musk predicted that a Tesla would drive without human assistance by 2017, while the Cybertruck, unveiled in 2019, didn’t ship until 2023. “I am pathologically optimistic with time. Have been ever since I was a kid,” said Musk on X in May.

The Model 2 timeline better move faster—or those cheap Chinese EVs might really be a problem.

>>> Weekly Market Update: Nvidia Does It Again

Weekly Market Update: Nvidia Does It Again

Coming into the week the path for least resistance clearly remained to the upside for global equity markets. ECB officials stayed steadfast pointing to a June rate cut as all but guaranteed. Fed officials remained vociferous that though they want to see additional data to confirm a disinflation trajectory, but also the next move will not be a hike. The glow of all things AI continued to support trading heading into a key event from Microsoft, and of course Nvidia’s earnings. Crude prices tracked lower by -4% adding to the positive landscape for investors. The S&P and NASDAQ continued to make fresh all-time highs. Ethereum jumped more than 20% on hopes of an SEC approval for spot ETFs and Bitcoin remained near $70K. For the week the NASDAQ rose 1.4%, S&P finished flat and the Dow fell 2.3%.

Equity markets finally encountered some turbulence mid-week after the latest FOMC minutes noted various participants mentioned their willingness to tighten policy further should risks to the outlook materialize. S&P PMI readings seemed to be a catalyst after April readings handily topped estimates, but more importantly the accompanying commentary on sticky inflation and pricing pass through weighed on sentiment. Selling begot additional selling in Thursday afternoons trading session after the 10-year TIPS auction saw tepid demand. The Fed's Bositc closed out that session by suggesting the Fed may have to be a little more patient when it comes to lowering rates in order to avoid overheating. Treasury yields rose with the 2-year pushing back up in the vicinity of 5% as investors remained sanguine on the prospects for any Fed rate cuts until late this year, if at all.

Nvidia blew away numbers and raised their outlook aggressively yet again. Importantly management continued to talk up and environment where demand is continued to far outpace supply through next year. CEO Huang reiterated that token generation will drive a multi-year build of AI factories. The AI behemoth also announced a 10:1 stock split after months of speculation, as well as announced 150% increase to its dividend. Microsoft and other PC producers introduced a slew of new AI products at the Microsoft AI event. JP Morgan held their annual investor day and tweaked higher their FY NII outlook, while CEO Dimon reiterated his own more tepid expectations given the current economic backdrop. Target Inc slumped after missing on the top and bottom line but reiterated they expect to return to positive SSS performance in Q2. Lowe’s Q1 results clearly outperformed that of Home Depot but SSS still fell 4% in the quarter. The decline in DIY big ticket discretionary spending was partially offset by positive comparable sales in Pro and online. Toll Brothers fell after their own earnings beat and raise, but both new and existing April home sales missed the mark by a wide margin. Boeing helped pressure the Dow’s 600 point decline on Thursday after indicating Q2 deliveries will not rise q/q and FCF is expected to be negative for the year.

MON 5/20
(TW) Taiwan Apr Export Orders Y/Y: 10.8% v 6.1%e (2nd straight positive reading)
HIMS Announces access to "compounded" GLP-1 Injections claiming same active ingredient; Prices start as low as $199 a month
JPM Raises FY24 NII 3.4% ex-CIB markets to $91B (prior 89B), adj expense outlook +1% to $92B (prior $91B) - investor day materials
MSFT Announces new category of AI-focused computers - AI day conf
OSG To be acquired for $8.50/shr in cash by Saltchuk Resources
PANW Reports Q3 $1.32 v $1.25e, Rev $1.98 v $1.97Be; Raises FY24 Outlook
RYA.IE Reports FY23/24 Adj Net €1.92B v €1.90Be, Rev €13.4B v €10.8B y/y; Approves €700M share buyback starting later this week
ZM Reports Q1 $1.35 v $1.19e, Rev $1.14B v $1.13Be; Raises FY guidance

TUES 5/21
(UK) APR CPI M/M: 0.3% V 0.1%E; Y/Y: 2.3% V 2.1%E
(US) Follow Up: Reportedly SEC on Mon asked Nasdaq and CBOE to make minor adjustments to spot Ether ETF filings, which could signal that approvals are near – press
LOW Reports Q1 $3.06 v $2.94e, Rev $21.4B v $21.1Be
TOL Reports Q2 $4.55 v $4.13e, Rev $2.84B v $2.52Be; Raises FY guidance

WED 5/22
(TW) China Military begins 'large-scale' drills 'surrounding' Taiwan; the drills are expected to end on Fri; May 24th – Press
(UK) APR CPI M/M: 0.3% V 0.1%E; Y/Y: 2.3% V 2.1%E
(US) CFPB to take steps to regulate BNPL firms, holding them to same standards as credit card firms – CNBC
(US) DOE CRUDE: +1.8M V -2ME; GASOLINE: -1M V -1ME; DISTILLATE: +0.40M V 0ME
(US) FOMC MAY MINUTES: MANY PARTICIPANTS COMMENTED ON THEIR UNCERTAINTY ABOUT THE DEGREE OF POLICY RESTRICTIVENESS
ADI Reports Q2 $1.40 v $1.26e, Rev $2.16B v $2.10Be; Guides Q3 Rev strong
DD To separate into three independent, publicly traded companies; Expects to complete separation in 18-24 months
MKS.UK Reports FY23/24 Adj £0.25 v £0.17 y/y, Adj Pretax £716.4M v £686Me, Rev £13.1B v £13.0Be; Starts tender offers for 2025, 2026 Notes in £400M at 4.750% and £300M 3.750% notes due 2026
NVDA Reports Q1 $6.12 v $5.49e, Rev $26.0B v $24.3Be; Confirms 10:1 stock split following speculation; Increases dividend 150%; "poised for our next wave of growth"
PDD Reports Q1 (CNY) 20.72 v 6.92 y/y, Rev 86.8B v 37.6B y/y
SNPS Reports Q2 $3.00 v $3.03e, Rev $1.46B v $1.52Be; Raises FY cont ops guidance following sale of SIG unit
TGT Reports Q1 $2.03 v $2.05e, Rev $24.1B v $24.5Be
TJX Reports Q1 $0.93 v $0.87e, Rev $12.5B v $12.5Be

THRS 5/23
(EU) ECB Q1 Euro-Area Negotiated Wage Index: 4.7% v 4.5% prior
(FR) FRANCE MAY PRELIMINARY MANUFACTURING PMI: 46.7 V 45.9E (17th month of contraction)
(UK) MAY PRELIMINARY MANUFACTURING PMI: 51.3 V 49.5E (moves back into expansion), above all estimates, highest since July 2022)
(US) INITIAL JOBLESS CLAIMS: 215K V 220KE; CONTINUING CLAIMS: 1.794M V 1.793ME
(US) MAY PRELIMINARY S&P MANUFACTURING PMI: 50.9 V 49.9E (5th month of expansion); Companies again sought to pass higher costs onto customers in the form of higher selling prices, the rate of increase of which accelerated slightly compared to Apr
(US) APR NEW HOME SALES: 634K V 679KE
992.HK Reports Q4 Non-HKFRS Attributable Net $218M v $158.4Me y/y, Rev $13.8B v 13.1Be y/y
DECK Reports Q4 $4.95 v $2.82e, Rev $959.8M v $880Me
INTU Reports Q3 $9.88 v $9.34e, Rev $6.74B v $6.63Be; Raises FY outlook
SCVL Reports Q1 $0.64 adj v $0.60e, Rev $300M v $292Me (1 est); Gained significant market share
WDAY Reports Q1 $1.74 v $1.57e, Rev $1.99B v $1.97Be; Lowered subscription revenue guidance reflects elevated sales scrutiny and lower customer headcount growth

FRI 5/24
(US) APR PRELIMINARY DURABLE GOODS ORDERS: 0.7% V -0.8%E; DURABLES (EX-TRANSPORTATION): 0.4% V 0.1%E

>>> US Early premarket gappers

Early premarket gappers
  • Gapping up:
    • VSTM +32.2%, CADL +24.8%, MRUS +18%, GTHX +8.8%, DECK +8.7%, ROST +7.2%, IOVA +7.1%, CHRS +7%, CRBP +5%, NWN +4.4%, BE +3.6%, EHAB +3.2%, STEP +3%, GH +2.8%, GIL +2.6%, AGEN +1.9%, TIGO +1.8%, LGF.A +1.6%, NCLH +1.3%, IP +1.2%, MU +1.2%, IMAB +1.1%, LILM +0.9%, FGEN +0.8%, BMY +0.7%
  • Gapping down:
    • GNLX -21.7%, WDAY -12.3%, DOMO -9.8%, AMWD -9.3%, HOWL -6.8%, INTU -6%, CVCO -5.5%, CGEM -3%, EXAS -3%, SUZ -2.1%, HCM -1.2%, HOOK -1%, HBI -0.8%, SF -0.7%, BGNE -0.7%