Last year was a fantastic one for Advanced Micro Devices, Inc. (NASDAQ:AMD) shareholders. AMD stock nearly quadrupled in price in 2016, setting the stage for a 22% gain this year. The ride so far, has been choppy.
Just in the last four weeks, shares have dipped from $14-plus to near $12, and back again.
It’s simply a different bull case for AMD stock — and a different set of expectations. When shares traded in the single-digits, expectations were low enough that any improvement could move the stock higher. And with Advanced Micro Devices positioning itself as a legitimate competitor to Intel Corporation (NASDAQ:INTC) for the first time in years, the huge run in the stock makes some sense.
Now, it’s a different case. Advanced Micro Devices needs to start generating consistent earnings to fuel the rally. The optimism for its Ryzen chips isn’t enough on that front. With AMD now taking on not just Intel but Nvidia Corporation (NASDAQ:NVDA) in datacenter, competition is key. And after the past few weeks, the results of that rivalry seem likely to determine the near- and mid-term trajectory of AMD stock.
Intel Responds
This week, Intel released its next-generation Xeon chips for servers. The mere fact that Intel had a public launch showed how seriously it takes the threat from AMD and Nvidia. After all, in 2016, Intel had 99.7% market share.
But as InvestorPlace columnist Brad Moon pointed out recently, AMD’s Epyc is a real challenger to Intel’s dominance in datacenter. Epyc is cheaper than Intel’s new Skylake Xeon chips, and its performance is competitive, particularly on a “performance-per-dollar” basis, as noted by website AnandTech.
This will be a closely watched space for all three companies — and results no doubt will have an effect on AMD stock. While Nvidia’s automotive opportunity gets much of the press, its datacenter revenue almost tripled in Q1, according to its 10-Q. Unlike Ryzen, AMD’s Epyc sales won’t cannibalize existing chips. And with cloud adoption only on the rise, the overall market means there’s room for growth for all three companies.
But for Advanced Micro Devices, that growth might be the most important, given AMD stock is priced near 20x 2020 EPS targets. And the company has a real shot. Epyc already has Microsoft Corporation (NASDAQ:MSFT) and Baidu Inc (ADR) (NASDAQ:BIDU) as customers.
If Advanced Micro Devices can add a few more, shares no doubt will catch a bid.
Cryptocurrency Growth
I argued last month that cryptocurrency mining was a bit of a silly reason to buy AMD stock, and I still think that’s the case. Indeed, prices of Bitcoin and Ethereum both have pulled back, with Ethereum falling by nearly half in the past month.
To be fair, cryptocurrency definitely isn’t a major driver for Advanced Micro, and the news surrounding mining probably brought in short-term traders rather than long-term investors. But for investors more bullish on the opportunity than I, Nvidia does appear to be targeting the space more aggressively.
If investors see AMD as a derivative play on cryptocurrency growth, market share in the GPUs used will be watched closely. Nvidia is a fearsome competitor, which means there, too, Advanced Micro Devices needs to bring its “a” game.
AMD Stock Still Looks A Bit Stretched
Admittedly, I’ve been all over the place when it comes to this stock — but then again, so has the market as a whole, particularly this year. But I still think a reasonably optimistic scenario for Advanced Micro Devices already is priced in.
It was gross margin concerns that led AMD stock to decline after the company’s Q1 report — and reports of lower Ryzen pricing means those concerns have some validity. Long-term EPS targets weren’t received well, either.
Advanced Micro Devices is taking share, and it has dramatically improved its competitive position. But the stock has gained some 400% in response. At some point, that optimism needs to turn into profits.
And it’s there that AMD’s work is only just beginning.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
