Advanced Micro Devices, Inc. (NASDAQ:AMD) has gotten off to a rocky start this year, with the shares off about 7%. But of course, this comes off a stellar 2016 where AMD stock logged a torrid 295% return.
So it seems only normal that there should be some profit-taking, right? Definitely.
That said, the question investors need to ask is just how cautious should they be heading into earnings tomorrow.
There’s plenty to be upbeat about, as Advanced Micro Devices CEO Lisa Su has proven to be one of tech’s most capable leaders. In just a couple years, she has made spot-on decisions on key initiatives and investments, such as with virtual reality, augmented reality and cloud computing.
Then again, Su has a rare blend of business and technical chops. She holds a bachelor’s, master’s and doctorate degrees in electrical engineering from MIT. What’s more, she has authored over 40 technical papers. And over the years, she has served at executive level positions at companies, such as Freescale Semiconductor Ltd (NYSE:FSL) and International Business Machines Corp. (NYSE:IBM).
The result is that AMD has an exciting pipeline of new innovations. For example, there is Ryzen, which includes next-generation artificial intelligence capabilities as well as much better performance, power usage and lower costs — at least compared to Intel Corporation’s (NASDAQ:INTC) 8-core, 3.2GHz Core i7-6900K.
In fact, AMD looks poised to snag a piece of the data-center market opportunity from INTC, which has about a 98% position. Let’s face it, potential customers like Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and salesforce.com, inc. (NYSE:CRM) would certainly like to have an alternative, especially chips that have lower costs.
While all this is great, there are still significant risks for AMD stock. Even though INTC may be somewhat vulnerable, the company still continues to plow huge amounts into R&D. The company is also known to be extremely aggressive in fending off rivals, such with discounting and promotions.
But INTC is not the only threat. Nvidia Corporation (NASDAQ:NVDA) is also a major factor. The company has shown quite a bit of traction in multiple growth markets.
For example, the company has built an AI car computing platform — called Nvidia Drive PX 2 — that uses high-performance chips and software to detect surroundings as well as determine optimal routes. Actually, there are over 80 automakers that use the system, including Tesla Motors Inc (NASDAQ:TSLA).
Bottom Line on AMD Stock
Some Wall Street analysts are getting concerned about the competitive forces, as seen with UBS Group’s Stephen Chin. Consider that his price target on AMD stock is a mere $5.50.
Besides, it already looks like investors have factored in much of the good news — and then some. Note that the consensus price target on AMD stock is $10.67.
What’s more, it’s important to keep in mind that turnarounds are choppy. This is especially the case when a small operator like AMD — which is constrained with capital resources — is making a play for large markets. To put things into perspective, AMD spends less than $1 billion per year on R&D, whereas INTC shells out more than $12 billion.
The earnings record has also been uneven. Even though the latest quarter was encouraging, the company still put out disappointing guidance. A big part of this was due to the seasonal drop-off of gaming revenues ahead of the holiday rush.
So on Tuesday, AMD will report earnings after the market closes. Yet, in light of the surge in the stock already and the uncertainties of the turnaround, it’s probably best to hold off for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.