Why the Advanced Micro Devices, Inc. (AMD) Stock Rally Isn’t Finished

It was bound to happen. Shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) rose from under $2 in February 2016 to over $15 barely a year later. After that kind of run in AMD stock, a breather was in order. Indeed, the stock has pulled back about 14% from those highs.

Why the Advanced Micro Devices, Inc. (AMD) Stock Rally Isn't Finished
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A downgrade to ‘sell’ by Goldman Sachs provided a significant downside catalyst, but profit-taking in AMD stock no doubt played a role.

With many investors having doubled or tripled their investment, at least, and larger funds needing to rebalance, some level of short-term selling pressure shouldn’t be considered a surprise.

But looking forward, short-term pressure doesn’t negate the long-term case. Advanced Micro Devices clearly has transformed its product set, and changed its reputation among not only investors, but customers. With the stock again bouncing, this time off 10-week lows near $12, there are a number of reasons why the rally in AMD stock should resume.

Advanced Micro Devices’ Market Share Gains Aren’t Finished

The new Ryzen processor line has received rave reviews. After its Bulldozer core flopped — one expert called it more like “bull–“ than bulldozer – AMD needed a hit. And by all accounts, Ryzen has delivered. For the first time in close to a decade, Advanced Micro Devices is a legitimate competitor to Intel Corporation (NASDAQ:INTC). And with PC sales appearing to have stabilized, share growth from Ryzen can drive overall revenue growth for the company.

But Advanced Micro Devices has opportunities beyond the PC. There’s been much discussion about Ryzen’s gaming capabilities, but with the rollout still early, there is room for improvement. Meanwhile, it now looks as if Vega GPUs will be released this quarter — giving AMD a worthwhile competitor to Nvidia Corporation (NASDAQ:NVDA).

New chips for servers will follow, and that represents another major opportunity for Advanced Micro Devices. Its server share has declined from 24% to just 0.4% over the past decade. Quite literally any share gains there will be accretive to its revenue and to AMD stock.

AMD Stock Remains a Short Target

This is not the market to be short, but short sellers continue to target AMD stock. Short interest had dipped to a five-year low by the middle of last year, but it has risen of late toward its highest level in close to a year.

In theory, I understand the short case here. Advanced Micro Devices’ valuation certainly isn’t perfect, and quick traders may have anticipated some of the early 2017 profit-taking. But valuation is a poor reason to short, especially when a company is performing well. (Just look at Amazon.com, Inc. (NASDAQ:AMZN) for a perfect example.) That higher short interest provides fuel for a short squeeze — the same types of squeezes that supported some of the monster run in AMD stock over most of 2016.

AMD Could Be a Takeover Play

We’ve seen Intel buy Mobileye NV (NYSE:MBLY). Qualcomm, Inc. (NASDAQ:QCOM) is taking out NXP Semiconductors NV (NASDAQ:NXPI) for $32 billion. In 2015 and 2016, a total of over $200 billion was spent on M&A in the chip space.

Advanced Micro Devices and Nvidia long ago were considered a potential pairing, and that’s still possibly the case. A merger of the two would cement dominance in gaming, and add to Nvidia’s overall portfolio. AMD’s new acquisition in virtual reality could help its case as well.

Micron Technology, Inc. (NASDAQ:MU) could look to diversify away from its focus on memory chips with an AMD stock acquisition. InvestorPlace contributor Larry Ramer has suggested that tech giants such as International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) could be interested.

I’m not terribly confident in an Advanced Mirco Devices takeover, particularly in the near-term. But it is a potential outcome. And the fact that it’s even possible speaks to the transformation at the company over the past few years.

After all, past takeover speculation focused largely on AMD’s assets. Any takeover in 2015 or 2016 would have been something close to a ‘vulture’ acquisition, buying its assets in hopes of executing a turnaround.

That turnaround is here, however. Advanced Micro Devices is on its way toward being a legitimate competitor in processors, GPUs and server chips. That’s why AMD stock has soared, and that’s why, from a long-term perspective, its run isn’t finished.

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

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/advanced-micro-devices-inc-amd-stock-rally/.

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