AMD Stock Is Poised to Keep Advancing for Awhile

AMD stock can continue to head higher until major new competition emerges

By Luke Lango, InvestorPlace Contributor

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Why AMD Stock Will Rally Before Its Earnings Announcement

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Chipmaker Advanced Micro Devices (NASDAQ:AMD) refuses to cool down, and there are good reasons for that. AMD stock is up nearly 200% in 2018, and it rallied yesterday on bullish commentary from analysts at Susquehanna. AMD stock now trades at nearly $30, its highest level since early 2006.

This big run will continue for now. The fundamentals, technicals, and sentiment of AMD stock all look strong at the current moment. This stock will attract buyers looking to buy the breakout. It will also attract buyers who think AMD is morphing into something huge. And it will attract buyers who are short sellers rushing to cover as AMD stock keeps heading higher.

This big run, however, won’t continue forever. AMD stock faces a big risk in late 2019, and no one really knows how the stock will react to that risk. Thus, Advanced Micro Devices stock is a name that you should own now and sell later ahead of the headwinds that will occur in late 2019.

AMD Stock Has Been on Fire

There is no doubt about it. Advanced Micro Devices stock has been on an absolute tear, running from under $2 in late 2015 to $30 today.

Why the huge run higher? In a nutshell, AMD is releasing next-gen chips now, while its main competitor, Intel (NASDAQ:INTC), won’t release next-gen chips until late next year. Thus, AMD has a window of at least 12 months to significantly grow its server market share. The server market is critical because it includes cloud data centers which are proliferating very rapidly. Plus, Susquehanna noticed that AMD is gaining share in the CPU market, too.

In other words, everywhere you look, AMD is increasing its market share.

When AMD grows its market share, AMD stock tends to soar. Why? Because AMD is the smallest legitimate player in a very, very large chip market that supports Intel and Nvidia (NASDAQ:NVDA), two companies with $150 billion-plus valuations.

Even after this year’s nearly 200% rise, the market capitalization of AMD stock is under $30 billion. Thus, if the era of AMD market share gains continues and the company transforms into a legitimate competitor of Nvidia and Intel, AMD stock could easily become a multi-bagger over the next several years.

For argument’s sake, let’s say that AMD follows in Nvidia’s footsteps. Five years ago, Nvidia’s revenue was $4 billion, and its revenue is expected to total $13 billion this year. AMD’s revenue last year was about $5.3 billion. Thus, in five years, AMD could generate revenue of roughly $16 billion.

Nvidia’s adjusted operating margins are around 40%. Thus, AMD could easily get to 20%-30% operating margins in five years in an “everything goes right” scenario. With $16 billion of revenue, AMD could easily generate earnings per share of $3 in five years. Based on a multiple of 20 times profits, which is average for high-growth companies, the long-term price target for AMD stock would be $60.

Beware 2019 Headwinds

The aforementioned $60 long-term price target on Advanced Micro Devices stock is mere speculation.

I’m not claiming that AMD stock will meet the target. Instead, I’m saying that this is what the market will believe as long as AMD continues to grow its market share. As has been shown many times in the past,  as long as this company’s market share is increasing, the market fully believes in the most bullish scenario. In that scenario, AMD stock can reach $60 over the long-term, so investors will buy AMD stock at $30.

But historically speaking, the most bullish scenario never plays out. Instead, Intel always punches back, and that punch ends AMD’s market share gains and proves nearly fatal for it. Investors ditch the bull thesis, and AMD stock drops like a rock. That scenario played out in 2005-2006.

I don’t know if that will happen again. But it is a possibility. With that in mind, the best strategy is to hold Advanced Micro Devices stock now and sell it later.

Over the next several quarters, AMD will continue to grow its market share, its numbers will remain great, and the market will fall in love with the long-term bullish thesis on AMD stock.

But in late 2019, Intel will launch new chips, giving AMD major competition. That major competition will end the era of easy market share gains for AMD, and its numbers will weaken. Then, the market will fall out of love with the long-term bull thesis on AMD stock.

At that point, AMD will likely stop heading higher. If history repeats itself, the stock could actually collapse. AMD’s risk-reward ratio looks good for the next 12 months. Thereafter? Not so much.

As of this writing, Luke Lango was long AMD, INTC, and NVDA. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/amd-stock-is-poised-to-keep-advancing-for-awhile/.

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