Despite releasing Ryzen in the last quarter, along with launching Epyc and Vega in the current quarter, shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) are in danger of breaking down. A 5% decline in the technology sector in the week prior to the fourth of July may explain part of the reason for AMD’s drop.
The best thing to do now? AMD investors may just want to tune out of the short-term noise and instead concentrate on the long term.
AMD Takes Market Share from Intel
According to Zdnet, PassMark testing rose to 26.2% for AMD CPUs. This is up from 17.8% last year. This could only mean that AMD is taking market share from Intel Corporation (NASDAQ:INTC). Some skepticism over the extrapolation in this data is warranted. Customers buying AMD may overwhelmingly download and test the system build with PassMark. Intel customers may decide the system is stable and does not need any third-party software performance tests. This behavior would imply AMD’s market share growth is overstated.
Fundamentally, AMD’s Ryzen chip refresh will contend favorably over Intel’s Kaby Lake. Further, Intel’s gap will narrow further this year when positive reviews for Ryzen 5 and 7 CPUs convince customers to buy AMD chips instead. At similar price points, customers get more cores and better performance with Ryzen.
Later this year, Advanced Micro Devices will go after the budget-minded consumer with Ryzen 3. At very low price points, AMD will accelerate its market share growth. Investors need not assume profit margins deteriorating because AMD will not sacrifice that for the sake of growing its user base.
Profitability Will Drive Share Price
Short-term price movements on AMD stock are driven largely by short sellers covering the stock and profit-taking when it moves too high, too fast. Until AMD starts reporting quarterly profits, the market trading action will dictate the share price. Thankfully, Ryzen’s sales are on full throttle. Sales of Epyc, the server chip, will ramp up. AMD already signed Hewlett Packard Enterprise Co (NYSE:HPE), Dell, Samsung Electronics (OTCMKTS:SSNLF) and others.
In the graphics card market(“GPU”), AMD announced details of Vega. A leaked benchmark shows that the card will outperform GTX 1080, made by Nvidia Corporation (NASDAQ:NVDA), albeit only by a small margin. Vega will run at 1630 Mhz, have 484GB/s of bandwidth, and will have 8GB of HBM2 memory.
In this current period, AMD will include a full quarter of Ryzen sales. Polaris, the GPU card, is sold out due to high demand from cryptocurrency mining. By the next quarter, AMD will have Epyc, Threadripper (a high-end processor) and possibly Raven Ridge on the market.
OEM suppliers, notably Dell and HP Inc (NYSE:HPQ), will start selling AMD-powered desktop solutions. Looking ahead to later this year, the OEM market will start selling Ryzen mobile processors.
Markets are right in expecting AMD to reach profitability later this year. The company just completed investing in its chip supplies. The sale of high-end chips will more than offset those fixed-cost investments. As sales volumes ramp up, especially for the high ASP (average selling price) products, profit margin will expand. This will happen slowly at first but will then accelerate.
OEMs are central to the strategy of growing chip sales in the next few years. By the time AMD is cash flow positive, Ryzen chips on mobile will give AMD’s revenue another boost.
Takeaway on Advanced Micro Devices
AMD is very volatile and will attract traders. Yet the stock is suitable for the patient value investor. In the quarters ahead, fundamentals will drive the company’s prospects, and its share price, higher.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
