In any sector or trend, a few companies come to dominate. The headline names may attract considerable attention, but the real returns can often be in the companies providing the infrastructure behind it.
These “pick and shovel” plays may lack for an exciting story, but when it comes to investing, a boring idea that’s profitable tends to have a better valuation than going after the exciting story. In the cloud services space, server processors make the most attractive story.
Rather than focus on tech conglomerates or software plays, companies making server chips could be the big winners there. In that space, Advanced Micro Devices (AMD) looks like a potential winner that’s attracting analyst attention.
Like other chipmakers, it’s been a tough year for investors, with the share price getting cut in half. But that’s also taken AMD’s valuation to a more reasonable 18 times earnings from 44 last year. And even with a drop in earnings, growing server chip revenue has helped lead to an overall 29 percent rise in revenues.
Action to take: Investors may want to pick up shares on a down day for the stock, and look to keep accumulating on dips. The company doesn’t pay a dividend at this time, but can be a winner in the next bull market for the chip space.
For traders, a long-dated call after this year’s performance could fare well. The September 2023 $90 calls, last going for about $5.00, are reasonably priced for high-double-digit upside.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.