Chip-maker Advanced Micro Devices (NASDAQ:AMD) has been one of the hottest stocks for over three years now. In early 2016 this was a $2 stock. In the 44 months since then, AMD stock has increased by more than 15-fold to over $30.
The ride from $2 to $15 hasn’t always been smooth, but it has taken a spectacular ride higher that has produced a 1,400% gain in AMD stock.
Right now, AMD stock is going through one of those bumpy patches. Escalation of the U.S-China trade war in August has weighed on AMD stock. From late July to early September, AMD stock shed 7% amid broader market turbulence and chip stock woes.
This pain in Advanced Micro Devices stock is temporary for two big reasons. First, the trade war won’t last forever — instead, tensions should deescalate from here into the end of 2019. Second, AMD’s secular market share expansion narrative — which has been the fuel for the stock’s 1,400% rally since early 2016 — remains alive and well.
As such, near-term trade war weakness will pass. When it does, it will be replaced by long-term market expansion strength — meaning the smart thing to do with AMD stock is to stay the course.
Near-Term Trade War Weakness Will Pass
The first big reason to stay the course with AMD stock is because near-term trade war weakness will inevitably pass, and probably soon.
In case you haven’t noticed, the U.S.-China trade war has followed a rather predictable cycle. The two countries will have negotiation talks, and comment favorably on those talks. Markets rally in response. Then, one country basically breaks from the talks, and says the talks aren’t going well. Sometimes that break is accompanied by more tariffs. Markets drop in response. After that, the two countries get back to negotiation talks, and again comment favorably on those talks. Lather, rinse, repeat.
Right now, we are a month into the part where the countries break from the talks and throw down a new round of tariffs. History says that within the next month or so, the two countries will comment favorably on trade talk progress, potentially even remove or delay tariffs, and markets will rebound.
The fundamentals also line up with this idea. If you zoom out, neither the U.S. nor China wants the trade war to get much uglier in the near term. China’s economy is rapidly slowing, and China has consistently prided itself in having one of the fastest-growing economies in the world. Elevated trade tensions will only further weigh on China’s economy in the near term.
Meanwhile, the U.S. is heading into an election year, and U.S. President Donald Trump has consistently tied the success of his presidency to the success of the U.S. economy and stock market. Elevated trade tensions will only dampen the U.S. economy and markets for the foreseeable future.
As such, over then next 12 to 16 months, neither side really wants to up the trade war ante all that much. If anything, both sides have an incentive to put the trade war on hold for the next 12 to 16 months, and then resume talks after the 2020 election and once China’s economy stabilizes.
For all these reasons, I think that today’s elevated trade tensions will dramatically cool over the next few months. As they do, AMD stock should move higher.
AMD’s Market Share Expansion Narrative Remains Robust
The second big reason to stay the course with AMD stock is because the company’s secular market share expansion narrative remains as robust as ever.
Let’s take a step back. The big rally in Advanced Micro Devices stock from $2 in early 2016, to $30 in mid-2019, has been powered almost exclusively by one thing: market share expansion. Long story short, AMD is a small company operating in some very large markets. Those very large markets have produced the likes of Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) — two companies with $100 billion-plus market caps.
Back in early 2016, AMD’s market cap was around $2 billion. But AMD started to launch products which were on par with and arguably better than what was being launched over at Intel and Nvidia. The result? AMD started gaining market share. The company has been gaining market share ever since, and AMD stock has consequently been on a massive run higher.
Today, this market share expansion narrative remains as robust as ever. The market cap at AMD? Just about $30 billion, versus $100 billion at Nvidia and $200 billion at Intel. AMD’s share of the entire processor market in 2Q19? 17.5%, up 1.5% quarter-over-quarter, including big gains over the past several quarters in both the server and desktop markets. Thus, AMD is still a relatively small company quickly gaining share in big markets.
So long as this remains the case, AMD stock will remain on a long term uptrend. EPYC is gaining tremendous traction in the cloud market, as all major U.S. cloud players are now AMD customers. AMD just rolled out the computer industry’s first 7nm CPUs with Ryzen 3000. Gaming console refreshes in 2020 should provide a meaningful boost to AMD’s gaming business.
Consequently, for the foreseeable future, AMD’s market share expansion narrative will remain robust and AMD stock will grind higher.
Bottom Line on AMD Stock
AMD stock has been on a secular uptrend since early 2016 thanks to the company’s ability to rapidly gain share in the very valuable and large CPU and GPU markets. This market share expansion continues today, and will persist for the foreseeable future. So long as it does, AMD stock will grind higher. Near-term trade war weakness is nothing more than noise in the big picture.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.