When the year got started, Advanced Micro Devices, Inc. (NASDAQ:AMD) shares were trading at below $3. But it would not take long for investors to get excited about the company, especially as the turnaround plan started to show results. Now, AMD stock is now fetching $11.90, up a hefty 315% for the year — putting the market cap at roughly $11 billion.
This performance was even better than the red-hot Nvidia Corporation (NASDAQ:NVDA), which logged an impressive gain of 250%.
Keep in mind that between 2013 to 2015 AMD stock was mostly dead money. In fact, the return for the past decade remains a horrible drop of 44%!
So, might the recent surge be an overreaction, or is Advanced Micro Devices poised for substantial long-term growth?
To help answer these questions and get a sense of the investment potential with AMD stock, let’s take a look at three pros and three cons:
Three Pros to Owning AMD Stock
Ryzen: Advanced Micro Devices has spent the past couple years developing this technology (which was formally known as Zen) — and it looks like it could be a gamechanger. For next year, it will be part of a chip called Summit Ridge, which appears to have artificial intelligence capabilities along with better performance, better power usage and lower costs than Intel Corporation’s (NASDAQ:INTC) 8-core, 3.2GHz Core i7-6900K that came out in May.
According to InvestorPlace.com’s James Brumley: “[The system] will likely be price competitive too. Although no official word [has] been given, initial estimates peg the processor’s price at between $500 and $600, versus the i7-6900K’s (current) sticker price of just over $1,000.”
Market Opportunities: With Advanced Micro Devices’ Ryzen technology, the company will be in a nice position to grab market share from its core market for gaming, which requires compute-intensive systems. But of course, there is potential for capitalizing on the growth in virtual reality as well.
According to Digi-Capital, the market is expected to hit a massive $30 billion by 2020. Keep in mind that mega operators like Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Samsung (OTCMKTS:SSNLF) and Sony Corp (ADR) (NYSE:SNE) are making big-time bets on the opportunity.
Great, right? Definitely. Yet the biggest opportunity for AMD — at least within the next few years — could be from the datacenter. INTC has about 99% of the market, which generated $4.54 billion in revenues during the latest quarter. So if AMD stock can peel off a modest piece of this, the company would become a hot growth play. It certainly helps that many potential customers like FB, GOOG and Salesforce.com, inc. (NYSE:CRM) would like a more cost-effective alternative.
And besides, there are already signs of traction. AMD recently signed a major deal cloud-computing deal with Alibaba Group Holding Ltd (NYSE:BABA). The company hosts 35% of China’s websites.
Strong Leadership: When Lisa Su became CEO of AMD a couple years ago, it was almost a nonevent. Let’s face it, Wall Street had essentially thrown in the towel.
But Su has shown that she knows how to get an old-line tech company into gear. Then again, she has set forward the goals of making standout products but also focusing on sustainable profitability.
It’s important to note that Su has strong technical chops. She has a bachelor’s, master’s and doctorate degrees in electrical engineering from MIT. What’s more, she has authored over 40 technical papers.
But along the way, Su has served at executive level positions at companies like Freescale Semiconductor Ltd (NYSE:FSL) and International Business Machines Corp. (NYSE:IBM).
Three Cons to Owning AMD Stock
Choppiness: The earnings for AMD stock can be erratic … just look at the recent report. While Advanced Micro Devices posted a solid increase in revenues, the outlook was disappointing. The main reason was the seasonal drop-off of gaming sales because of the end of the holiday rush.
Going forward, there will also likely be volatility as AMD takes aim at the datacenter industry. The fact is that the sales cycles will be long because of the rigorous evaluations of the technologies.
Besides, Advanced Micro Devices already has substantial customer concentration. Consider that the top five customers represent 75% of net revenues. In other words, a delay in orders can have a major impact on the top-line.
Competition: INTC is definitely going to fight hard to maintain its market position. The company not only has the benefit of its massive financial resources but also the following:
- Long-term relationships with customers and partners
- De facto control over industry standards
- The wherewithal to engage in a grueling price war
What’s more, there’s a good chance that INTC will come up with a much better chip. Perhaps the competitive fervor will spur more action? This is what analysts at UBS think will happen. As a result, the price target on AMD stock is at a mere $5.50.
Valuation: AMD stock is currently trading at about 2.6X sales. By comparison, INTC is at 3X and Qualcomm, Inc. (NASDAQ:QCOM) sports a multiple of 4X.
Granted, if growth at Advanced Micro Devices perks up, then the multiples will look much cheaper. But during the past decade, the company’s best year showed net income of roughly $500 million — translating into an implied multiple of 20X. Overall, it looks as if Wall Street is already discounting much of the potential growth.
And finally, the stock price is at more than a 40% premium to the Wall Street consensus.
Buy or Sell Advanced Micro Devices?
As I’ve written various times this year for InvestorPlace.com, I’m a bull on the long-term prospects of Advanced Micro Devices. The company’s experience in graphics systems is a big advantage. Moreover, the company has been smart to focus on growth markets like VR, cloud computing and AI.
Despite all this, there should probably be some caution. The end-of-year spike in AMD stock — up about 71% since the election of Donald Trump — has really been excessive. Even the most consistent strong growth companies have cooling off periods. And I don’t think Advanced Micro Devices stock will be an exception.
So what to do? For now, it’s best to hold off on AMD stock — and wait for a better price.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
