Advanced Micro Devices, Inc. Stock Is Stuck After Its Big Turnaround

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Advanced Micro Devices, Inc. (NASDAQ:AMD) has been on a bit of a roller-coaster this year. After a banner 2016, the AMD stock price has been rangebound and volatile since late January.

amd stock

That volatility has continued over the past two weeks. Though AMD’s Q3 earnings beat estimates, the market sold off AMD stock anyway. A downgrade from Morgan Stanley (NYSE:MS) added to the pain. But after the announcement of a partnership with Intel Corporation (NASDAQ:INTC), the AMD stock price once again is trying to rebound.

The volatility makes some sense, as AMD lacks a story at the moment. Last year, the story was about AMD’s comeback, a clear case that helped AMD rise almost 500% from its lows. Now, the story is more murky. And until that story gets more clear, I’d expect AMD stock to continue to yo-yo.

Is AMD Winning?

Purely from the numbers, it’s hard to see why AMD sold off following the Q3 report. Revenue rose 26%, gross margin (a concern that drove the post-Q1 sell-off ) rose 400 bps and adjusted EPS rose to $0.10 from $0.03 the year before. AMD guided for revenue to decline quarter-over-quarter in Q4 but still expects 26% year-over-year growth in the quarter. Full-year revenue guidance was raised to growth of over 20%.

It certainly doesn’t seem like the type of quarter that would lead to a double-digit sell-off, at least from a headline standpoint. But some investors and analysts pointed to concerns in the numbers. Gross margin guidance was a bit weaker than expected, and much of the improvement in Q3 came from IP licensing revenue, which generally is inconsistent.

Most notably, there’s a clear concern that revenue growth is getting a near-term bump from cryptocurrency mining. CEO Dr. Lisa Su herself admitted on the Q3 conference call that “there will be some leveling-off” of demand from miners.

I argued last month that AMD’s story was played out, and that indeed seems to be the case coming out of earnings. Investors are starting to look toward 2018 and beyond. And as good as this year’s results appear, those investors remain concerned about what’s coming ahead.

AMD Stock Needs More

Those concerns are valid. AMD stock still trades at 35x next year’s earnings. For all the improvements made over the past seven quarters, this still is a company that never has driven sustained profitability. Margins need to get better. AMD has to be able to lap this year’s launches from a revenue standpoint as well.

Can AMD get there? Absolutely. Will it? It’s far less certain. Looking at Q3, for instance, pretty much of all the growth came from Ryzen CPUs and Radeon GPUs. The enterprise segment saw flat revenue, with semi-custom SoC weakness offsetting growth from IP licensing and Epyc data center chip sales.

That distribution isn’t great from a 2018 perspective. Ryzen was a major upgrade in competing against Intel. From here, there’s a few quarters’ contribution from the high-end Threadripper. After that, growth comes from the slow grind of trying to take CPU share from Intel in what should be a flat market, or close. Vega is trying to challenge the dominance of Nvidia Corporation (NASDAQ:NVDA), which will be similarly difficult.

As a bearish analyst pointed out, that leaves a heavy reliance on Epyc, where AMD is competing in data center with both Nvidia and Intel, the latter of which had the market to itself until reliance.

So the story has changed. In 2016, the gains were based on the new product launches and AMD’s potential to finally, legitimately compete with the market leaders. Now, the story is about how well AMD will compete. With Intel ramping up its own game, that’s a much tougher, less compelling story, and it seems to explain why AMD stock is struggling to gain traction.

Trading AMD Stock

For now, I simply don’t think the story is good enough, particularly at the current valuation. AMD undoubtedly is in far, far better shape than it was two years ago. As I’ve pointed out before, AMD bonds traded below 60 as recently as February 2016, a price that suggested bankruptcy was a possibility. But the stock also trades about 6x higher than it did 21 months ago.

As such, the stock still is pricing in years of growth, most of which has to come from market share gains against the two most dominant chipmakers in the world. ASPs (average selling prices) have held up, one piece of good news in AMD’s Q3, but that could change. Semiconductor manufacturing still is a cyclical business, though investors seem to have forgotten that problem outside of Micron Technology, Inc. (NASDAQ:MU).

AMD likely will take more market share, and it likely will continue to grow earnings. But even with the AMD stock price below $12, some share gains and some EPS growth isn’t enough. AMD needs faster growth, and another compelling story for investors. Until then, I’d expect the stock to stay stuck.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/amd-stock-stuck-turnaround/.

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