The semiconductor industry demonstrated fresh signs of life in 2016, and long-embattled Advanced Micro Devices, Inc. (NASDAQ:AMD) finally charmed Wall Street. Last year, AMD stock smashed records — and silenced the bears — with a roughly 300% return.
This year, the chipmaker is ahead for the year at 8% returns, but in light of what essentially is market performance mixed with resistance and volatility, questions remain about whether AMD has any bullish energy left.
Advanced Micro Devices isn’t without tailwinds, however. The question is how much further AMD stock can glide on their back.
The cryptocurrency world is oft-cited by those trying to make the case for AMD stock. Today, the top three digital “coins” — Bitcoin, Ethereum and Ripple — combine for $92 billion in market capitalization. And both Advanced Micro Devices and Nvidia Corporation (NASDAQ:NVDA) eagerly seized on the opportunity with crypto-specific GPUs.
Essentially, computer programmers utilize these advanced GPUs to verify blocks of transactional data within the Bitcoin architecture, called the blockchain. Whoever verifies the data first (which involves solving complex mathematical problems) receives cryptocurrency for their troubles. (I explain this “mining” process further a recent Bitcoin article.) InvestorPlace contributor Brad Moon says AMD’s GPUs enjoy an advantage over Nvidia chips as it relates to mining.
Furthermore, the much-feared Bitcoin fork failed to dilute the original cryptocurrency’s trading volume and participation. Bitcoin continues to set all-time highs on a nearly daily basis, with prices near $4,300 representing a 370% increase so far in 2017 alone.
Given the meteoric rise of Bitcoin, this new trading platform is a big boost for AMD stock. Indeed, even management has admitted as such.
Unfortunately, the Bitcoin rally may be a double-edged sword for AMD stock.
Advanced Micro Devices Needs More Diversification
For starters, while the company’s latest Radeon Vega processors are impressive, GameChangers’ editor Hilary Kramer believes it’s not impressive enough. She explains:
“While the fastest Vega in this wave can apparently hit 13.7 trillion floating point operations per second at peak single precision and 27.5 TFLOPS at peak half-precision — more than enough to play games in extreme resolution and stream the video to your friends, for example — it’s actually not groundbreaking stuff. The previous iteration of Vega clocked 13 TFLOPS, and GTX 1080 still ran the killer apps faster.”
So while Advanced Micro Devices may enjoy street cred among Bitcoin miners, that advantage doesn’t necessarily solve the company’s other issues.
To stay competitive with its GPU rival and perennial pain-in-the-rear Intel Corporation (NASDAQ:INTC), management has to convey something distinct. Offering a graphics card that is just a tad better for mining is no fix-all solution.
In addition, Barclays analysts recently warned that AMD stock may be too dependent on cryptocurrencies. If enthusiasm for digital coins dries up, that spells big trouble for Advanced Micro. According to the analysts, without cryptocurrency-related sales, AMD actually lost GPU market share to Nvidia.
Even if digital currencies never collapse, the current price point is not economical for buying an AMD graphics card. Barclays analysts state that Ethereum, the No. 2-ranked crypto, needs to move beyond $550 for mining with the AMD chip to make economical sense.
I should point out here that I’m a firm believer in cryptocurrencies. Ethereum, in my view, can hit $1,000, no problem. But for investors of AMD stock, this is just an opinion like any other. But one thing we all can agree on is that Bitcoin and digital currency markets are phenomenally viable, and if Barclays’ assessment is accurate, that volatility could negatively impact shares.
Fundamentals Don’t Support AMD Stock Right Now
We’ve come to a point where hope and momentum simply aren’t enough to carry Advanced Micro Devices. This is increasingly becoming a “show me stock” where fundamentals are beginning to matter, and so far, AMD is good … but not great.
InvestorPlace contributor Luke Lango did an excellent job of explaining why the valuation of AMD stock is spread too thin. Specifically, he argues that the company’s forward projections are excessively optimistic in light of realistic growth trends for semiconductors.
More importantly, the availability of better options hurts AMD. Why invest something that might grow by double digits when some of its competitors do it consistently? Also, Nvidia enjoys exposure and dominance to several pioneering industries, most notably driverless technologies. Again, if cryptocurrencies go south, Advanced Micro has some business diversity, but not necessarily enough to weather that storm without a nick.
AMD has done very well for investors over the past year-and-a-half. Furthermore, executive management has righted a sinking ship and deserves due credit.
At the same time, we can’t buy today to celebrate yesterday’s news. Despite its improvements, the company has to show more on the operational end before it’s worth of a buy at current prices.
As of this writing, Josh Enomoto is long Bitcoin and Ethereum.
