Advanced Micro Devices (NASDAQ: AMD) stock is up more than 600% in the past three years. That type of move is typically exactly the kind of unbridled bullish investor enthusiasm that sends a value investors running for the hills. But while AMD stock certainly has an extremely high valuation, there’s a clear fundamental justification for the rally.
AMD Technology Finally Superior
For years, AMD chips were considered inferior to similar technology from competitors such as Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTC). However, in the past several years, the stars have aligned perfectly for AMD.
AMD launched its Ryzen PC processor portfolio back in 2017 on the 14 nm node and updated it to the 12 nm node in 2018. Now, the company is expected to launch its 7 nm node products in 2019. At the same time, Intel’s 10 nm node products have been delayed by three years, allowing AMD to eclipse its much larger rival in process node technology.
As a result, AMD’s share of the notebook and desktop CPU markets has jumped from 8% and 12% a year ago to 13% and 17% in the first quarter of 2019. That share should continue to rise as long as Intel struggles to catch up.
At the same time, AMD is making meaningful strides in the server processor market as well. Intel has historically had a near monopoly on this market. Advanced Micro Devices stock investors shouldn’t expect AMD to overthrow Intel anytime soon, but the trends are certainly headed in a positive direction.
AMD’s server processor share jumped from 1% unit share in Q1 2018 to 2.9% unit share in Q1 2019, according to Mercury Research. AMD has said it also has 5% market share of the dual-processor market.
Partners Are Taking Notice
It’s not just investors that are taking note of the strides AMD is making in its technology. Last week, Samsung (OTC: SSNLF) announced a new multi-year partnership with AMD to develop custom mobile graphics technology. Financial terms of the deal were not disclosed. Bank of America estimates it could add up to 10 cents per share in EPS for Advanced Micro Devices stock.
Perhaps more important, a deal with a company the size of Samsung once again underscores the fact that AMD’s technology is getting some major attention and respect.
AMD’s list of high-profile customers is impressive and growing. In addition to Samsung, that list now includes Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Baidu (NYSE: BIDU), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Sony (NYSE: SNE), Dell (NYSE: DELL) and HP (NYSE: HPQ).
“The Samsung wins also showcases the leverage in AMD’s trove of IP in computing and graphics,” Bank of America analyst Wamsi Mohan said. “Other large markets of autos, IoT, and networking/5G are not a focus today but could be addressed over time with other partnerships.”
Window Is Closing
Any investor wondering why AMD stock price is up more than 600% can re-read this article. AMD is firing on all cylinders and has really brought its A-game with its latest technology. However, there is a major problem with buying shares at such elevated levels.
AMD may have some impressive tech, but Intel has really dropped the ball with its innovation. Investors expecting Intel to roll over and let AMD eat its lunch aren’t being realistic. AMD’s window of opportunity to win over Intel’s business is closing. It’s only a matter of how long it will remain open.
On any given day, David can beat Goliath. However, expecting it to happen over and over again is a bit of a stretch.
“While we believe AMD will enjoy share gains, we question the sustainability of these gains in the face of larger peers with more resources,” Morningstar analyst Abhinav Davuluri said.
AMD stock bulls can point to a company like Netflix (NASDAQ: NFLX) as a David that went up against the Goliath of traditional media and was somehow able to repeatedly beat them year-after-year with little to no resistance.
However, this is typically not how the business world operates. Innovation can trump size and money for a little while. But the rule of thumb is that Goliath wins out eventually.
There’s no question AMD is real deal. But buyers looking to start a position at this elevated level should understand the risks. And anyone sitting on a 600% gain should at least consider taking some profits at this point.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.