The Advanced Micro Devices, Inc. (AMD) Stock Rally Needs a Break

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AMD stock - The Advanced Micro Devices, Inc. (AMD) Stock Rally Needs a Break

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Advanced Micro Devices, Inc. (NASDAQ:AMD) has been one of the more interesting — and more volatile — names in tech for the last 18 months. AMD stock gained nearly 300% in 2016 alone, climbing from $2 a share in early 2016 to more than $15 in a little more than a year. Then, a rough stretch in May, fueled by a disappointing Q1 earnings report, trimmed about 35% off the advance.

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The volatility in Advanced Micro continues.

Shares are flipping between positive and negative territory Thursday, following a roughly 18% run in five days. That includes a double-digit pop Wednesday.

Bulls point to sold-out graphics cards used for cryptocurrency mining, as well as the new Epyc server chips. Meanwhile, Goldman Sachs reiterated its “Sell” rating on the shares. Now, about six weeks later, AMD stock has bounced from $10 to near $13, all with very little news from the company itself.

I turned more cautious on AMD after a difficult May, and the current volatility leads me to maintain that skepticism.

To be sure, Advanced Micro isn’t necessarily heading back to the single digits; the volatility will ease a bit. But the big bull case and projections of $15-plus, or even $20-plus per share, strike me as too optimistic at this point. The stock deserves most, if not all, of its gains so far.

But the drivers for another leg up in the AMD rally simply don’t look strong enough.

Can Ryzen Push AMD Higher?

The clear driver of much of the ~300% run in AMD stock was optimism about its new Ryzen line of processors. And with good reason.

Most notably, Ryzen made AMD a legitimate competitor to larger rival Intel Corporation (NASDAQ:INTC) for the first time in a long time. With PC sales finally stabilizing somewhat after years of decline, market share gains would mean revenue growth. That revenue growth in turn would allow the company to reverse years of losses. Indeed, analysts are estimating a full-year (albeit non-GAAP) profit for Advanced Micro Devices in 2017.

But “profitable” alone isn’t enough to support a $10 billion-plus market cap. And it sure looks like much of the Ryzen optimism is priced into AMD stock.

Advanced Micro Devices reportedly is cutting Ryzen prices, just months after its debut. The share price decline following the Q1 report was driven largely by disappointment in Q2 gross margin guidance — possibly a result of those lower prices.

The new Ryzen-based “Threadripper” is drawing some coverage, but its place in the high-end gaming market seems limited. Again, AMD stock has a $10 billion-plus market capitalization. Ryzen is helping profits — but it’s already added billions of dollars in value. Intel remains the market leader, and PC sales very well may have another leg down. Ryzen alone doesn’t seem like enough to prolong the rally.

Advanced Micro Devices and Cryptocurrency

The stock gained 15% over three days of trading coinciding with reports about the role of Advanced Micro Devices GPU in mining cryptocurrencies Bitcoin and Ethereum. But at least one analyst has pointed out that GPUs from AMD and rival Nvidia Corporation (NASDAQ:NVDA) are for Ethereum only, not Bitcoin.

It hardly seems a coincidence that AMD’s sharp gains matched the peak of what looked like Ethereum hysteria. That currency has seen a substantial correction and, unsurprisingly, AMD stock has followed.

 

It’s true that, as CNBC reported, many AMD graphics cards are sold out. But the company saw a similar spike in 2013 — and it was short-lived. The idea that Ethereum, in particular, can be a consistent, long-term driver for Advanced Micro Devices’ GPU business seems optimistic, to say the least.

And if it isn’t, then buying Ethereum itself seems like a better option than a small derivative play like AMD stock.

Earnings Have to Drive AMD Stock

The argument around Advanced Micro Devices near $13 isn’t whether Ryzen will take share from Intel, or whether Ethereum should trade at $340 or $34, or whether its new Epyc server processors — built on its Zen architecture, featuring up to 64 threads and boasting outstanding power — will unseat INTC and its Xeon product.

It boils down to whether Advanced Micro Devices finally can drive consistent earnings — and how much.

From that standpoint, optimism about cryptocurrency mining, Epyc or Threadripper is outweighed by the company’s own guidance. When the company guided for target earnings of 75 cents per share by 2020, the bull case for AMD stock took a big hit. Assuming a 20x earnings multiple, AMD would be worth roughly $15 by then. That, in turn, implies a current value, discounted back at 8%, of about $12.

But a 20x earnings multiple might be aggressive. Nvidia has soared, and trades at a hefty multiple. But most chip stocks, including Intel, Micron Technology, Inc. (NASDAQ:MU), and Qualcomm, Inc. (NASDAQ:QCOM) trade well below 20x earnings. For AMD, which still will be heavily exposed to a flat-at-best PC business, 20x may be too much at that point.

The bull case for AMD stock is that “this time is different” and investors have been given of lot of evidence to support that. The problem is that at this point, the bull case has to be different, too. It has to be based on the idea that the company finally can generate consistent earnings — and enough to support a higher share price.

Some of the recent news swirling around Advanced Micro Devices supports the idea that it can be profitable. But after the huge gains, that alone simply isn’t enough.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/the-advanced-micro-devices-inc-amd-stock-rally-needs-a-break/.

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