Many a tear has to fall, but it’s all, in the game, at least according to the popular song. Forgive shareholders of Advanced Micro Devices Inc. (NASDAQ:AMD) if they’re humming it over the next few months, because any hope for gains in AMD stock from here depends on a game. Specifically, a video game — any video game — and a new graphics chip for gaming called Radeon RX Vega, which AMD is preparing for release.
The new Vega places processing on the chip alongside the stacked memory it requires for that processing, delivering 3D and virtual reality graphics, at low power. If it delivers as hoped, it could give the company a one-year lead over rival Nvidia Corporation (NASDAQ:NVDA), the market leader, and deliver a nice pop to shares.
Without a new catalyst, however, today’s investment in AMD stock could all end up like a lot of love affairs: in tears.
By a conventional measure, Advanced Micro Devices looks fully valued right now.
The fourth quarter of 2016 saw AMD losing $51 million (5 cents per share) on revenue of $1.106 billion, and the quarter to be announced May 2 is not expected to be any better — a loss of 7 cents on revenue of $982.7 million.
AMD achieved only one net profit in 2016, during the second quarter, but traders have pushed the market cap to over $14.18 billion — 3.5 times its sales — on hope of a brighter financial future.
Yes, the success of the company’s Ryzen processors allowed it to shore up the balance sheet last year, and debt is now less than half the company’s assets. There was also positive operating cash flow last quarter, for the first time in years.
But future gains from here are speculative, as our Josh Enomoto noted recently.
At some point, the fundamentals are going to reassert themselves, and when they do, AMD stock is in for a hard fall.
Why the Speculation?
AMD is hot, with almost half its analysts still believing the “buy” case because it’s unique among semiconductor stocks.
Being a minnow against games leader Nvidia and mainstream processing leader Intel Corporation (NASDAQ:INTC) means the company serves huge markets and can get a big pop if it demonstrates market leadership in those areas.
Under Dr. Lisa Su, the company is demonstrating just that kind of leadership.
AMD no longer owns a fabrication plant. Its chips are made by Global Foundries and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). This means the company can supply new markets quickly, with low capital costs.
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Almost all U.S. chip companies today are “fabless” — the costs of manufacturing inevitably grow exponentially with complexity, which I have called “Moore’s Second Law” — driving most producers out of the market.
Bottom Line on AMD Stock
Dr. Su and her team have engineered a remarkable run in Advanced Micro Devices. You could have gotten in for less than $2 per share as recently as March 2015, and the stock will open the second quarter at around $14.60 per share.
No matter how well the new products perform, the gains in AMD stock from here can’t be that great, on a percentage basis. It’s the way numbers work.
Even if everything works out for AMD, in other words — even if the new game chip sells out and the mobile chip is a wonder — your best gains are in the rear-view mirror, with most analyst price targets sitting at just $16 to $20 per share a year from now.
For me, the risk is just not worth that reward.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he was long INTC.