Advanced Micro Devices, Inc. (AMD) Stock: Big Profits for Strong Stomachs

Advertisement

Whenever a stock more doubles within a year, investors have a right to get antsy. This is the case right now with Advanced Micro Devices, Inc. (NASDAQ:AMD), and for good reason. The history of AMD is peppered with lousy execution and missing out on big opportunities.

Advanced Micro Devices (AMD) Stock: Big Profits for Strong Stomachs

But this time really could be different. The fact is that AMD stock could be poised for much more growth over the next few years.

While virtual reality is touted as the savior, that’s a false narrative right now. Just look at the struggles Facebook Inc (NASDAQ:FB) is having with its Oculus system. So far, the volumes have been dismal, and it has yet to produce any breakout games.

So why should we believe in AMD stock? Well, something less glitzy: the datacenter business.

AMD Takes on Intel

The dominant player in this space is Intel Corporation (NASDAQ:INTC), with a whopping 98% share. Last year, this business ginned up nearly $16 billion in revenues and a juicy operating profit of $7.8 billion.

This is a sweet spot for AMD stock, if it can grab it.

CEO Lisa Su, who has a tremendous background in the chip industry, has made gutsy early investments to get a piece of this opportunity. Before joining Advanced Micro Devices, she held stints at companies like Freescale Semiconductor Ltd (NYSE:FSL) and International Business Machines Corp. (NYSE:IBM). She also holds a doctorate degree in electrical engineering from the Massachusetts Institute of Technology and has penned more than 40 technical papers.

Regarding the play for the datacenter, AMD will release a new chip architecture called Zen that’s based off INTC’s x86 design, but shows better speed. A key has been AMD’s long history with advanced graphics, powering some of the world’s top gaming platforms including Sony Corp’s (ADR) (NYSE:SNE) PlayStation and Microsoft Corporation’s (NASDAQ:MSFT) Xbox.

Intel is no pushover, but it’s a pretty good bet that potential customers like Alphabet Inc (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook will not ignore an alternative. Plus, AMD is likely to offer lower-cost options, and perhaps better feature sets.

If anything, the company’s graphics prowess should be a key differentiator as datacenter activities include more advanced processes like machine learning and artificial intelligence.

This Zen technology should be launched during first-half 2017, so the impact could be felt soon. In fact, AMD is already getting a little traction. The company recently announced a collaboration with Alibaba Group Holding Ltd (NYSE:BABA) “to strengthen research and cooperation related to the use of AMD Radeon Pro GPU technology in Alibaba Cloud’s global datacenters.”

Alibaba currently hosts about 35% of all websites in China.

AMD Stock Isn’t for the Timid

In the meantime, expect the financials to be volatile. Because of AMD’s heavy reliance on the game console business, revenues are expected to drop 18% (plus or minus 3%) in the current quarter. You can thank the end of the holiday business surge for that.

Still, it’s important to note AMD’s actions to bolster its balance sheet. The company recently raised $1.4 billion in an equity offering, and it has lowered its debt load $606 million over the past quarter to just $1.63 billion, versus $1.3 billion in the bank. AMD also announced a five-year partnership for sourcing of its chip manufacturing, which should help provide more cost discipline.

You’ll still need a strong stomach if you invest in AMD stock. The company is taking some big risks and is dealing with tough rivals.

But if AMD can pull all this off — just by getting even a modest piece of the datacenter opportunity — the stock’s breakneck returns will continue.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/advanced-micro-devices-inc-amd-stock-big-profits-iplace/.

©2024 InvestorPlace Media, LLC