After a blowout 2016, Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has had a roller-coaster 2017. A strong early-year run sent AMD stock to its highest levels in almost a decade.
But a disappointing Q1 earnings report tanked shares, briefly. AMD dipped below $10, but has since regained those post-earnings losses. Shares are now up more than 18% year to date after quadrupling in 2016.
I still expect AMD stock to settle down. The optimism toward Advanced Micro Devices over the past year and a half makes some sense. The new Ryzen line makes AMD a legitimate competitor to larger rival Intel Corporation (NASDAQ:INTC) for the first time in years.
After nearly a decade of losses, Advanced Micro Devices expects to become profitable — and strongly so — going forward.
However, shares now trade at roughly 24 times the company’s 2020 EPS target. It’s a multiple that requires substantial growth for many years. And, I continue to question whether the “new” Advanced Micro is capable of driving that growth, let alone enough profit to push AMD stock even higher.
Ryzen Is a Legitimate Driver
At this point, it’s looking like the early optimism behind Ryzen was justified. There were some early bugs, but reviews have been solid. The ultra-high performance version, Threadripper, gives AMD a potential foothold in the high-end gaming market.
Given that gaming has pushed Nvidia Corporation (NASDAQ:NVDA) stock to huge returns, gaming market share gains should help Advanced Micro Devices on both the top and bottom lines.
The impact of Ryzen is apparent in AMD earnings. While gross margin expectations disappointed coming out of Q1, revenue increased 18% year-over-year. Advanced Micro Devices is expecting another 12% increase in Q2, thanks to help from Ryzen.
Advanced Micro Devices Needs More
But again, AMD is trading at 24 times 2020 EPS targets. Intuitively, it’s difficult to argue that Ryzen alone can justify that multiple.
After all, PC sales are flat (and that’s considered good news). Come 2018, what CPU growth AMD can drive is going to come from market share gains. Gaming can help on that front, but while high-end gaming is a valuable market, it’s not necessarily a huge one. AMD can take some share from Intel, but pricing will have to be a part of those efforts, and could pressure margins.
Intel itself is trading at barely 11x 2018 analyst EPS estimates, which shows investor caution toward the PC space as a whole. So does the barely 10x forward multiple assigned to HP Inc (NYSE:HPQ).
Ryzen alone probably won’t keep AMD stock at current levels, let alone drive it toward $20. I’m simply not sure the other drivers here are quite enough to continue the bull run, either.
Datacenter and Cryptocurrency
The idea that cryptocurrency mining can be a driver for AMD stock strikes me as far too optimistic. Advanced Micro Devices saw a similar bump in 2013, which faded quickly, as did the benefit for shareholders.
More broadly, investors optimistic about Ethereum in particular should just buy Ethereum, rather than a derivative play.
The idea that there’s enough mining demand to create a multi-year demand benefit for Advanced Micro Devices, yet not enough to materially lower the Ethereum price (and thus reduce that demand), seems somewhat contradictory. AMD now is worth almost $13 billion. But, I’m skeptical cryptocurrency impacts that valuation very much.
The other potential driver is the Epyc chip for datacenters. That could help Advanced Micro, as the company has basically zero market share in that business. In this case, that’s a good thing. Every incremental Epyc sale creates revenue growth.
The question there, too, is whether AMD’s opportunity is big enough. Intel dominates the market and may pick up its game in response to Advanced Micro Devices’ new efforts. Nvidia has posted huge growth there as well.
Bottom Line for AMD Stock
Going from sub-$1 shares to high single digits will help AMD. But expecting some sort of three-way share of the market among Nvidia, Intel and Advanced Micro Devices seems a bit too aggressive.
All told, it sure looks like shares are pricing in a lot of growth, but little risk. To be sure, investors and analysts have said this several times over the past 18 months. AMD stock has shrugged off that negativity.
But to push to $15 and beyond, Advanced Micro Devices is going to have to come up with more than Ryzen.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
