This Is as Good as It Gets for Advanced Micro Devices, Inc.

Congratulations on the huge run-up, AMD stock owners, but sell before this rally reverses

By Ian Bezek, InvestorPlace Contributor

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Analysts Are Chasing AMD Stock Like the Rest of Us

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Advanced Micro Devices, Inc. (NASDAQ:AMD) has staged an incredible recovery over the past two months. AMD stock bottomed out at $9 in April. That appeared to be a decisive breakdown out of the $10-$15 trading range that AMD stock has long stayed within.

However, AMD’s skeptics were in for a surprise. Since hitting $9, AMD stock has surged. In fact, in nearly a straight line, Advanced Micro Devices has rallied from the lows all the way up to nearly $16 now. Now, it appears the stock is heading for levels not seen since 2007. But this move is likely to leave bulls disappointed.

Here’s why AMD will not be able to continue its recent run for much longer:

Analysts: Last Quarter Not Sustainable

In its most recent quarter, Advanced Micro Devices put up almost 40% year-over-year revenue growth. That is a great feat. In fact, it’s AMD’s fastest quarterly revenue growth rate since 2013. However, therein lies the problem. In 2013, that revenue growth quickly went in reverse — by the end of 2014, revenues were declining, and in 2015, AMD’s sales went into deep decline.

Analysts see the same sort of thing happening this time around. The consensus has AMD seeing sales momentum dip sharply in the back half of 2018 and decelerate further from there.

Notably, over the past three months, analysts have barely touched their AMD recommendations or price targets. The consensus price target has moved from the high 14s to just the low 15s over that stretch while the stock is up more than 50%. Often, when a stock surges, analysts rush to boost their price targets. That’s simply not happening to a significant degree in this case.

Tougher Road Ahead for AMD Stock

While AMD is putting up great results now, things get more difficult going forward. For one thing, AMD’s GPU business will come under a lot more fire. Key player Raja Koduri left AMD and went to Intel Corporation (NASDAQ:INTC). Predictably, news reports this week confirmed what analysts had suspected; Intel will be entering the GPU market. The company is expected to release its first GPU offerings in 2020. Between it and Nvidia Corporation (NASDAQ:NVDA), AMD will have its work cut out simply maintaining its market share.

And on the CPU front, AMD has caught up to Intel for now. But since AMD relies on third-party foundries, it inherently runs at a disadvantage against Intel, which has its own in-house operations that give it an advantage on scale and faster roll-out for new product lines. Intel’s jump to 10-nanometer technology will again put AMD in a tough place going forward.

Crypto Remains a Problem

In 2017, AMD stock bears pointed to crypto as a major risk for the company. Clearly, it didn’t play out that way. Bitcoin and altcoin prices shot to the moon in December 2017, and mining demand remained robust into 2018. There was no drop-off in sales as bears had hoped for.

That should change, going forward, however. Bitcoin itself is down close to 70% now off the December highs. It’s continuing to plummet, down more than 10% additionally just this week to prices well below $7,000. The major altcoins — which are more easily mineable with the sort of rigs that AMD sells — are also plunging.

As of the first quarter of 2018, Advanced Micro Devices estimated that 10% of its revenues were related to the blockchain. That may not seem like a big portion of business. However, it clearly drove a huge chunk of the company’s overall growth. Remember that bitcoin was around $1,000 in Q1 2017, and $10,000 in Q1 2018. Much of AMD’s marginal revenue growth, the thing that made the eye-catching 40% growth rate possible, will now go in reverse as crypto prices plummet and demand dries up. Remember that crypto was causing firm pricing in the gaming segment as well, as regular demand was crowded out. That effect should flip back unless the price of bitcoin reverses sharply.

Stock Dilution Ahead

AMD stock owners should be concerned about dilution going ahead. One of the proposals in AMD’s annual meeting was to increase its total authorized share count from 1.5 billion to 2.25 billion shares.

Needless to say, if AMD actually ends up selling all that newly permitted stock, it’d be a gigantic dilution that would crush the share price. It’s unlikely it would sell so much stock at one time. Still, it seems clear that AMD is thinking about funding itself with its currently high stock price. The CEO’s answer to a Goldman Sach’s analyst question about potential share issuance did little to change this perspective. AMD’s share count has risen every single year since 2003, and shares outstanding are up more than 20% just since the end of 2015.

From a business perspective, it’d make sense to raise money by selling even more stock now. The company has more than $600 million in net debt, including a chunky $223 million in loans coming due over the next year. Given rising interest rates and AMD’s weak cash flow generation ability, it’s unlikely to get attractive interest rates on a refinancing. Why not pay that debt off with money raised from a secondary stock sale and shore up the balance sheet in case lean times return like in 2015?

AMD Stock: Sell the Pop

AMD stock has enjoyed an incredible run in recent weeks. Short-sellers have gotten burned. The company’s surprisingly strong earnings release clearly caught the market off guard, and the AMD faithful have been rewarded.

But a huge run up in the stock has done little to fix AMD’s core headwinds. The crypto gains are fleeting, and with bitcoin tanking, crypto is likely to become a drag on earnings within a quarter or two. Intel is fighting back against AMD’s revival on both the CPU and GPU front. And with AMD’s weak balance sheet, investors should expect more stock dilution in coming quarters. All in all, the signs point to an AMD stock correction ahead.

At the time of this writing, the author owned INTC stock. You can reach him on Twitter at @irbezek.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/this-is-as-good-as-it-gets-for-advanced-micro-devices-amd-stock/.

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