There’s good reason why Advanced Micro Devices Inc. (NASDAQ:AMD) stock has soared. AMD stock traded below $2 as recently as early 2016. It now trades above $12 some 19 months later, after pulling back from post-crisis highs above $15.
The gains make a good deal of sense. In February 2016, AMD stock looked like dead money at best, and the company’s solvency wasn’t certain. AMD bonds maturing in 2022 traded as low as 59 cents on the dollar, a figure that priced in a material risk of bankruptcy.
But a turnaround clearly has taken hold. The new Ryzen line of CPUs have made AMD a real rival to Intel Corporation (NASDAQ:INTC) for the first time in more than a decade. AMD GPUs (graphics processor units), after a bumpy launch, are benefiting from cryptocurrency demand, while also taking the first step toward challenging the dominance of Nvidia Corporation (NASDAQ:NVDA) in gaming. And Epyc data center chips have a chance to take some of Intel’s near-100% share in that space.
The improvement in AMD stock makes sense, because it’s followed the improvement in Advanced Micro Devices as a company. AMD chips no longer are just the cheapest option, used mostly for budget laptops. The company is a legitimate player in its space. That, in turn, should give Advanced Micro Devices some level of pricing power. Improvement in AMD’s gross margin — stagnant for years — should follow, allowing the company to finally post consistent earnings growth.
It’s a good story, and recent developments show that the story continues to play out. I still fear, however, that the good news remains mostly, if not totally, priced into AMD stock.
Good News in CPUs for Advanced Micro Devices
Since a surprise profit in the second quarter was reported in late July, AMD stock has pulled back. But since that time, there have been some pieces of good news, particularly on the product front.
Ryzen continues to get solid reviews. Last month, Wells Fargo & Co (NYSE:WFC) analyst David Wong argued that Ryzen and Intel’s new Coffee Lake microprocessors, on their own, could help the PC market, particularly as Ryzen notebook processors are released in the second half. Better chips from both companies means better performance. That, in turn, gives investors an incentive to upgrade. The lack of that incentive has been cited as one of the drivers of relatively weak PC and notebook sales over the past few years.
Bernstein analyst Stacy Rasgon also theorized that Ryzen had an impact on Intel’s selling prices in Q2 after reviewing Intel’s earnings report. A “race to the bottom” in terms of pricing wouldn’t be good for either company. But that assessment seems to confirm that Advanced Micro Devices is the legitimate competitor to Intel, bulls argue.
Data Centers and GPUs
The Epyc chip for data centers is also driving analyst optimism. Canaccord Genuity argued “risk/reward is still tilted toward the upside,” as AMD tries to gain share in the space. The decision to use four chips instead of one for Epyc has garnered some discussion, but Jefferies Group LLC (NYSE:JEF) has argued Epyc can help gross margins, a big point of contention for bulls and bears in AMD stock.
In regard to GPUs, cryptocurrency demand appears to be continuing, with no signs of slowing down (though Bitcoin’s recent pullback might provide some near-term pressure). AMD does suffer from a low supply of Radeon RX cards, according to reports (due, in large part, to lower yields), but investor optimism toward gaming has driven up stocks ranging from NVDA to peripheral maker Logitech International SA (USA) (NASDAQ:LOGI) to Activision Blizzard, Inc. (NASDAQ:ATVI). And there’s clearly enough demand for AMD’s gaming chips to allow that tailwind to hit AMD stock as well.
Across the board, Advanced Micro Devices looks like it’s executing well. Market share gains, if they haven’t occurred already, look to be on the horizon. I can see why AMD shareholders might be frustrated at the decline over the past few weeks — and a relatively quiet year-to-date performance in what’s been a torrid year for tech.
Is All This Priced Into AMD Stock?
The issue is valuation. AMD stock trades at 40 times next year’s consensus earnings-per-share estimate. The company’s 2020 target is for EPS of 75 cents per share. Unless AMD trades at 21x+ that figure at that point — or beats that target — the current price isn’t terribly attractive, given the time value of money.
It’s certainly possible that AMD’s multiple will stay elevated or that AMD will beat that target — but it’s not guaranteed. And even after a strong year, I’m not sure it’s likely enough to argue that risk/reward is hugely slanted in favor of buying AMD stock.
Advanced Micro Devices has turned itself into a legitimate competitor across its end markets. But AMD stock has risen 500%+ in response.
I’m just not sure there’s that much upside left, at least in the near- to mid-term.
As of this writing, Vince Martin has no positions in any securities mentioned.
