Out of U.S.-based companies with market caps of $2 billion or more, Advanced Micro Devices, Inc. (NASDAQ:AMD) is the ninth-biggest winner of 2016. And drilling down to just the tech sector, AMD stock is the year’s single biggest winner.
Just a year ago, AMD was left for dead. The Sunnyvale, CA-based company appeared to have finally given up the ghost after years of underperformance.
But that’s all changed now.
AMD stock added more than 300% over the past year, and anyone fortunate enough to buy shares at $2 early in 2016 is now looking at a quintuple.
Faith in AMD finally bore fruit. Can the rally continue even after this monster move? Or is now a good time to take profits/and or wait for a correction?
AMD Stock Cons
Still Not Profitable: AMD last produced full-year profits in 2011. Over the past five years, it has consistently lost money. Often, in large quantities. On top of that, the company failed to produce positive free cash flow over the past five years. A company that can’t generate profits or cash flow will not survive all that long. Hence, AMD’s penny stock status for much of the past several years. AMD appears to be turning the corner. Revenues surged more than 20% in AMD’s most recent quarter versus the same period last year. Still, the company continues to operate with a negative net operating margin.
This shows that AMD is losing money, even before paying taxes and interest on its debt. And forward analyst estimates for 2017 suppose that the company will only produce marginal profits, with the forward price-earnings ratio still running near 100. AMD stock represents a turnaround story where the stock has already performed, even though the new business model isn’t proven yet.
Zen Launch: AMD stock has continued to surge over the past month, with shares rising from the $6s to above $10. Much of this enthusiasm centers around the launch of the new Zen technology. This offers AMD the opportunity to make a strong push back into the high-end CPU market. Intel Corporation (NASDAQ:INTC) has dominated this area in recent years. Should Zen launch well and pick up momentum, however, it could make serious inroads into both the server and gaming markets.
At this point, it’s worth considering that this upside may be fully priced into AMD stock. AMD’s launch party, titled New Horizon, for the Zen platform, will be hosted next week. AMD will show off the technology Dec. 13 in Austin. Investors who have been buying the stock ahead of this announcement may take profits afterward. And should anything disappoint with the launch, it could serve as a short-term rally killer.
Still Struggling in GPUs: The focus on Zen has made it easier to forget about AMD’s issues elsewhere. The most obvious might be in the graphic processing unit space. Here, Nvidia Corporation (NASDAQ:NVDA) serves as the primary competitor. And Nvidia is winning. Most recent quarterly results showed Nvidia with more than 50% year-over-year revenue growth. Nvidia generated more revenues from its GPU business alone than AMD earned across all business lines. And unlike AMD, Nvidia is very profitable.
Against Nvidia’s 60% growth rate in gaming, AMD showed just 10% year-over-year growth in its computing and graphics segment. And AMD’s division lost money. Yes, there’s a boom in gaming. But no, it’s not doing a whole lot for AMD’s financial results.