Can Advanced Micro Devices, Inc. (AMD) Stock Perform an Encore in 2017?

Advanced Micro Devices, Inc. (NASDAQ:AMD) shares slipped at the start of the year, losing as much as 5.3% in the last week of 2016 and early 2017 in sympathy with rival Nvidia Corporation (NASDAQ:NVDA) stock, which tanked 13% over a similar timespan. Nvidia took a big hit after famous Wall Street short Seller Citron Research panned the company and highlighted it as a good bear play.

Can Advanced Micro Devices, Inc. (AMD) Stock Perform an Encore in 2017?

Nevertheless, both AMD and Nvidia performed exemplarily well in 2016. AMD stock managed to recover from a two-year slump to finish with gains of nearly 300% while NVDA stock was the best-performing stock in the S&P 500 in 2016 after tacking on gains of 224%.

AMD Stock Slugging It Out With Intel

Many investors will naturally be wondering whether AMD has enough gas left in the tank for another big rally in 2017, or whether the latest selloff marks the beginning of a major downturn.

First off, AMD’s recent slip is somewhat odd considering the issues highlighted by Citron Research are either neutral or positive for the company. Specifically Citron Research said Nvidia’s recent growth in the pivotal gaming console market has been coming at the expense of AMD and not through winning new addressable markets.

In my view that’s a positive for AMD because the company is now better positioned to compete with Nvidia than it was in the past. The company has seen its share of the discrete gaming processor market slip from 40% six years ago to around 13% currently, but could be on the cusp of turning things around.

AMD’s [in]famous battles with Intel Corporation (NASDAQ:INTC) in the x86 server market over the last decade are to blame for this sad state of affairs. For a brief moment in history, AMD managed to outmaneuver and outgun Intel in 64-bit server processors, grabbing as much as 25% market share by 2006.

But slugging it out with a company more than ten times your size is never an easy thing to do. Intel responded with a series of attacks and managed to claw back nearly everything. A battle-weary AMD was left with little cash to invest in the booming GPU market, and was unable to keep up with Nvidia in process nodes. Even worse, AMD could not compete with NVDA in the top tiers of the market, where margins are fatter.

Facing Off With Nvidia

AMD has, however, been holding its own quite well lately. The company has evolved into the biggest supplier of console processor chips, a rapidly growing market, and one where Nvidia is not nearly as strong. The company manufacturers APUs (integrated CPU/GPUs) for Microsoft Corporation’s (NASDAQ:MSFT) Xbox One and Sony Corp (ADR)’s (NYSE:SNE) PS4. Nvidia only recently managed to win a GPU contract from Nintendo, an underdog in the console world.

Both Microsoft and Sony issued upgrades for their respective consoles, which is a good thing for AMD stock since console sales are typically strongest the first few years after an upgrade. Advanced Micro Devices’ Embedded and Semi-Custom segment brought in revenue of $835 million during the last quarter (60% of total revenue), up a healthy 31% year over year and 41% sequentially. The segment also posted operating profit of $136 million, up 62% YoY.

Strong performance by this segment has trickled down to AMD’s graphics business. AMD’s graphic shipments increased 18.8% during the third quarter, thanks to the company’s new Polaris-based GPUs. The company though saw its overall GPU market share slip half a percentage point to 13% after failing to launch the much-anticipated AM4 for desktop gamers. AMD, however, plans to launch the AM4 alongside Zen-based Summit Ridge processors in Q1 2017.

More noteworthy perhaps is the fact that the company has been able to launch GPU processors that offer superior performance per dollar. Virtual reality remains the biggest highlight in the large PC gaming market. But current VR-capable GPUs tend to cost an arm and a leg, which limits adoption. AMD, though, launched the RX-480 in August, a Polaris-based VR-Ready solution that costs just $199. That looks like a steal compared to Nvidia’s Titan X that goes for a princely $1,200.

The competitive pricing is will more likely than not help AMD stock claw back some GPU market share from Nvidia in 2017.

The Bottom Line

Investors are perhaps justified for feeling jittery about owning a stock that nearly quadrupled in 2016. After all, such stocks rarely reward investors with an encore. A good case in point is Netflix, Inc. (NASDAQ:NFLX) stock, which finished as the top S&P 500 gainer in 2015, but underperformed the market in 2016.

The bullish case for AMD might, however, still be intact. The company’s major revenue segments are showing a new zest for life with a slew of innovations coming from its pipeline. Meanwhile, AMD is positioning itself as a top player in artificial intelligence and deep learning, the next big computing paradigm.

AMD stock might not scale to the dizzying heights it managed in 2016, but appears to still have plenty of growth runways ahead.

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

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