Calling 2016 a “good year” for Advanced Micro Devices, Inc. (NASDAQ:AMD) shareholders would be a considerable understatement. AMD stock is up 305% year-to-date, decisively ending a three-year dry spell.
Too much, too fast? Many would say so, pointing out that sales have been deteriorating since 2011 and the company has booked net losses in each of its past four years.
Although the top line perked up a bit in the third quarter, the computer component maker is still regularly in the red. AMD is going to have to pull off some sort of mini-miracle if it’s going to justify the stock’s current price anytime soon.
Thing is, it may well have a miracle or two up its sleeve for 2017.
Advanced Micro Devices to Rise With Ryzen?
It’s a rarity for a technology company’s fortune to be altered by the introduction of a new product. But, this is one of those times.
When Advanced Micro Devices unveiled its new “Zen” microprocessor technology in August, the market was hopeful, but cautious. AMD hasn’t been especially competitive in any market for a while, ceding to rivals like Intel Corporation (NASDAQ:INTC), Nvidia Corporation (NASDAQ:NVDA) and Qualcomm, Inc. (NASDAQ:QCOM), and though the specs for Zen looked good, doubts lingered that it would be able to do what it was supposed to do when the architecture was put to its pre-launch test.
Those worries, though, may not have been necessary. Zen is shaping up to be everything it was touted to be in front of its commercial debut in the first quarter of 2017. It may be the biggest and most successful launch Advanced Micro Devices has seen in a long, long while. Indeed, it wouldn’t be hyperbole to say Zen may end up saving the company.
The processor truly is an engineering marvel. Renamed Ryzen in the meantime, the first entry in the Summit Ridge line of desktop processors are a true 8-core, 16-thread CPU that operates at a minimum of 3.4 GHz. That’s a bit stronger than the most comparable processor from Intel: the Core i7-6900K, which operates at a base frequency of 3.2 GHz. The i7 can be boosted up to 4.0 GHz, and it’s not clear exactly how far the Ryzen can be pushed. It’s likely to be in that 4.0 gigahertz ballpark though, and it’s going to require less power to get there.
Ryzen has another dimension owners of AMD stock can get excited about — it’s got its own artificial intelligence technology built in that allows it to operate better. The Neural Net Prediction algorithm remembers which pathway a particular app runs best on, while Smart Prefetch tracks software behavior so it can best prepare the computer to run the program.
It will likely be price competitive too. Although no official word had 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.
And analysts have taken notice. Jefferies & Co. analyst Mark Lipacis recently upped the firm’s target on AMD stock to $13, up 22% from its current value of $10.66, explaining:
“We’ve argued that AMD’s IP is undervalued and that it is in the midst of a turnaround, and AMD’s demos this week of its new Zen MPU in high-end performance applications reinforce the latter part of this thesis. Our checks continue to indicate AMD’s Zen MPU is being well received in the enthusiast DT channel, and the Asia Cloud Server market.”
Canaccord analyst Matthew Ramsay echoed the idea, raising his target price on AMD to $13 as well, opining:
“While AMD shares have skyrocketed, we believe significant top-line growth may take some time as new products launch in 2017 and 2018. However, we believe only modest growth assumptions across these markets from very low CPU/GPU share levels today drive our estimates materially above consensus for both revenue and gross margin, as much investor skepticism remains.”
Ramsey expects next year’s revenue to reach $4.84 billion versus the average outlook for sales of $4.55 billion. He’s calling for a top line of $5.29 billion in 2018, while analysts are collectively expecting sales of $4.95 billion.
Advanced Micro Devices’ thinks it can secure a double-digit share of the high-performance market in the foreseeable future, up from essentially nothing now. Given Ryzen’s specs, that doesn’t seem out of line.
Bottom Line for AMD Stock
Although a turnaround is in the works, there’s still no denying AMD stock is overextended and ripe for a pullback. The market got a little overzealous about the timing of when the gradual rollout of Ryzen might actually start to legitimately help the bottom line. Don’t be shocked when investors come back to earth, and bring the stock with it.
On the flipside, don’t forget to use that pullback as a buying opportunity. Advanced Micro Devices is sitting on the most marketable product it has had in years.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.