Just a few weeks ago, Advanced Micro Devices (NASDAQ:AMD) was the hottest stock in the market. Everyone was buzzing about the company’s market share expansion in secular growth markets. Analysts were upgrading the stock. Insiders were saying that the company was on the cusp of something huge. AMD stock could do no wrong.
And it didn’t do anything wrong. From the end of July to the middle of September, AMD stock more than doubled, jumping from $15 to $35. The ascent from $15 to $35 looked like a straight line. There were hardly any dips, and it seemed like every day, AMD stock added a few percent.
That run is now over.
AMD stock has stalled out in the lower $30’s for the past two weeks. Investors and analysts have become less enthusiastic about AMD stock. Bernstein recently placed a “Neutral” rating on AMD stock, while Northland Capital downgraded the stock to “Market Perform”, citing “irrational expectations.”
Are expectations for AMD stock irrational right now? Is that why AMD stock price has stalled out recently?
No one really knows. What we do know, though, is that expectations for the company are high. And investors are unwilling to raise those expectations any higher until AMD proves it is actually gaining market share in the server market.
From this perspective, AMD stock has become a “show me” situation. The market has already pushed this stock up on expectations of huge market share gains. Now AMD needs to show the market that those gains are real before this stock rises significantly.
The Big Upturn in AMD Stock Price Has Paused
AMD stock price more than doubled from $15 to $35 in three months because investors were excited about the shares.
The consensus thesis in the market was that Intel’s (NASDAQ:INTC) next-gen chip production delays were giving AMD a huge opportunity to gain market share in the critical server market, which includes the all-important hyperscale data centers. Investors got excited. AMD’s market capitalization at $15 was around $15 billion. Intel’s market cap is north of $200 billion. Thus, if AMD is actually in the beginning stages of turning into a legitimate competitor in this space, AMD stock could turn into a multi-bagger over the next several years.
It isn’t all that surprising that investors were excited by these prospects. Not only is AMD’s growth potential huge, but there is also a strong and recent precedent. Nvidia (NASDAQ:NVDA) had a similar “breakout” over the past several years. In January 2016, Nvidia was a $15 billion company. Then its new, next-gen products enabled it to gain large amounts of market share and now, Nvidia is a $150 billion-plus company.
Is AMD stock on the verge of a similar rally? Perhaps. Excitement regarding the prospects of such a huge, multi-year rally is what sparked the recent surge by AMD stock.
But stocks don’t go up in straight lines forever. It appears that AMD stock has finally hit a wall. The stock has been stuck in neutral for two weeks in the lower $30’s, implying that this has quickly gone from a “buy now, ask questions later” situation to a “show me” situation. Before this stock goes higher, AMD needs to show the market that all the speculation about market share expansion is true.
AMD will have an opportunity to do that when it reports its earnings again. Until then, AMD will likely be stuck in neutral.
The Medium Term Is Promising
I think AMD’s market share is indeed expanding. The logic is pretty straightforward. AMD has its next-gen chips ready to go. Intel’s new chips won’t be ready until late next year. Meanwhile, capital spending on hyperscale has reached record highs and looks set to grow over the next several years as leading data center operators make large investments in order to maintain their market leadership.
With all of these dollars flowing into hyperscale capex and AMD having the best product on the market, it seems only logical that many data center operators will buy AMD’s chips instead of Intel’s chips. That will remain true until Intel launches its new chips. Consequently, AMD can increase its server market share over the next year.
Because of this dynamic, I think AMD’s numbers will be quite good over the next several quarters. During that stretch, AMD stock should head higher. The rally is on pause right now because the market needs to see proof of AMD’s market share expansion. The market will likely get that proof when AMD reports its results at the end of October. At that point AMD will resume its rally.
Consequently, the medium-term outlook for AMD is quite promising, as long as the company’s market share continues to look poised to expand.
Bottom Line on AMD Stock
I sold AMD stock recently to lock in my profits because I believe that AMD will be stuck in neutral for the next month. But I think the time to buy the stock will be before the company’s next earnings report because I believe that those results could be the catalyst which gets the shares rocking and rolling again. Until then, the sidelines seem like the best and safest place to hang out.
As of this writing, Luke Lango was long INTC and NVDA.
