A lot of water has gone under the bridge since I last wrote about Advanced Micro Devices, Inc. (NASDAQ:AMD) in mid-March. Investment pundits long and short AMD stock have covered the reignited CPU wars at a furious pace, with articles seemingly appearing by the minute.
Most of the chatter about AMD’s Ryzen 5 and Ryzen 7 processors is positive; the same holds true for AMD stock, which has ridden a momentum train over the last year that has seen it jump 295.1% through April 27 from its 52-week low of $3.45.
Now, though, the chatter is about to move toward earnings — and that could be the beginning of the next directional move.
Don’t Fight the Trend
Hey, I believe in this stock as much as the next guy, but for Advanced Micro Devices to deliver another 300% increase, it’s going to need a lot of good news surrounding its two recently introduced processors when it reports Q1 2017 earnings today, May 1, after the markets close.
The analyst consensus is a 4-cent loss on $982.6 million in revenue. Out of 26 analysts covering AMD stock, just three have a sell or sell-equivalent rating on it. Interestingly, despite a consensus among analysts to overweight the stock, the median 12-month target price is $12 — 10% below its April 27 closing price of $13.30.
As I said in my last piece about AMD stock, investing is a game of probabilities. The odds of it moving from $13.30 to the mid-$50s in the next 52 weeks is a Herculean task. I’m not saying a couple of good earnings reports won’t help bump it up to within spitting distance of $20, but for AMD to make it to the half-century mark, it has to do two things: (1) Prove Ryzen 5 is a game-changer, and (2) demonstrate that it can make money from Ryzen 5.
Is Ryzen 5 a Game-Changer?
InvestorPlace contributor Chris Lau recently discussed how the Ryzen 5 processor is attractively priced for the mainstream PC market, which should enable it to better compete with Intel Corporation (NASDAQ:INTC), the industry leader.
Unfortunately, since the Ryzen 5 launched in April, AMD won’t have any sales data to share May 1 other than a general overview of how the product’s been received in the marketplace.
However, its Ryzen 7 launch was in early March, so investors should get some sales data on that product which is essentially the same thing as the Ryzen 5 with eight cores instead of four or six.
The problem for AMD is that even if the Ryzen 5 is the greatest thing since sliced bread, the PC market is shrinking, and that has Intel speeding up delivery of CPU products currently in the planning stage to ensure it doesn’t lose market share to AMD. So, even with all the positive reviews on the Ryzen 5, AMD has its work cut out for it taking market share from mighty Intel.
That said, it has Intel looking over its shoulder for the first time in a long time.
From a speculation standpoint, Advanced Micro isn’t a bad play.
If its Q1 2017 earnings are better than expected — its whisper number is a 3-cent loss, so a penny better than analyst expectations — you can be sure that shares will jump on the news.
Analysts expect the company to make 8 cents in 2017, 28 cents in 2018 and 42 cents in 2019. That means AMD stock is currently trading at 32 times 2019 profits; Intel trades at 12 times its 2019 profit estimate of $3.04 per share.
The last time AMD made money on a GAAP basis was 2011, when it earned 66 cents per share on $6.6 billion in revenue. Ryzen, in all its various product offerings, is going to need to be a tremendous success if Advanced Micro wants to get back to those types of numbers.
It won’t be easy.
However, with analysts estimating 2018 revenue of $5.2 billion and $263.6 million in net profits, a 5.1% net margin is just 50 basis points less than in 2011. So, it’s possible for AMD to return to better times.
Bottom Line on AMD Stock
Advanced Micro Devices hasn’t been this high since 2007. That’s an entire bull market ago.
If you’re a momentum investor, I think there’s a case to made for hanging on for the next couple of earnings reports to see if the tide is continuing to turn for AMD. However, if you’re not a speculator, I don’t see the point in owning AMD stock.
Another 300% increase is not in the cards.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.