If someone were to ask me what the most exciting stock of 2018 has been, I would say chipmaker Advanced Micro Devices (NASDAQ:AMD). Not only is AMD stock up nearly 200% this year, but the debate as to where this stock goes next is as heated as ever.
AMD stock has popped in a big way like this before (2000 and 2005). Both times, the stock didn’t hold the gains, and fell 80% off its peak over the subsequent several years. Bulls are saying this time is different. Bears are saying it’s not. And, both are putting their money where their mouth is.
Despite AMD’s near 200% rally this year, the short interest on the stock remains big (nearly 20% of the float is short).
As such, with a near 200% rally under its belt and bulls and bears in an intense tug-of-war over where the stock will go next, I’d say that AMD has without a doubt been the most interesting stock of 2018.
But, where will this stock go next?
Bank of America Merrill Lynch thinks higher, on the idea that AMD has a tiny valuation relative to peers and the company has realistic potential to grow market share by leaps and bounds. Meanwhile, Arete thinks AMD will head lower, citing pipeline dreams of $2-plus in earnings per share as unrealistic.
Who is right?
Both are. In the near to medium terms, AMD will head higher due to market share expansion. In the long term, competition and valuations risks will rear their ugly head and create turmoil.
The Good About AMD
The good about AMD can be summed up in four words: tiny share, big market.
AMD makes the chips that essentially power all of today’s and tomorrow’s most important technologies. As such, the company has broad exposure to multiple secular growth industries, including data-centers, automation, and AI.
The sum value of these end-markets is massive, and that is why the chip space has birthed multi-billion dollar companies like Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA), both of whom have market caps in excess of $150 billion.
AMD has a market cap of under $30 billion.
Right now, that small market cap makes sense. In the all important sever market, AMD controlled less than 1% share last year, while Intel dominated more than 99% of the market.
But AMD is launching next-gen chips in this space, while Intel is delaying their next-gen chips until late 2019. This gives AMD a twelve month-plus runway to steal market share from Intel because AMD has the newest and best product on the market.
The consensus belief on the Street is that AMD can scale its market share in the server market to 15-20% over the next two years. If that happens, then AMD’s $30 billion market cap looks far too low next to Intel’s $220 billion market cap.
In a nutshell, the good about AMD stock comes down to the fact that this is a company with tiny but rapidly growing share in a huge market. Plus, that the current market cap on AMD doesn’t fully reflect this company’s ability to steal big chunks of market share over the next several quarters.
The Bad About AMD
The bad about AMD can also be summed up in four words: this has happened before.
If you look at a long-term chart for AMD, you will see that this stock really hasn’t gone anywhere over the past two decades. But, during that stretch, you will also see that AMD has been prone to big pops, not unlike the one we are seeing right now. Each time AMD did have a big pop (2000 and 2005), the stock proceeded to drop over the next several years.
Those drops weren’t small. Each time, AMD stock wiped out more than 80% of its value in a few years.
Bears are worried that history will repeat itself here. AMD has always had small market share in the huge and growing server market, which has historically been dominated by Intel. But, each time AMD starts to show signs of life and gain share, Intel punches back and takes that share right back. The net result is the pop-and-drop dynamic in AMD stock that most recently played out in 2005-06.
In a nutshell, the bad about AMD comes down to the fact that such huge gains in server share (and AMD stock) have precedents, and those precedents imply that the good times won’t last forever.
Where AMD Is Going Next
In the near to medium term, I think the bulls will be right. In the long term, I think the bears will be right.
Over the next twelve months, AMD will keep roaring higher because the company is running in open fields. Without a comparable Intel product on the market, AMD’s next-gen chips will be adopted en masse and without friction, leading to huge and easy market share gains.
During that stretch, AMD’s revenue and profit numbers will remain great, sentiment will remain bullish, and its stock will roar higher.
During each of the prior two huge rallies, AMD hit $40. I don’t think that level is unreasonable. A $40 peak during this rally seems very doable given the company’s runway for further market share gains.
In the long run, though, Intel will punch back, and that will hurt AMD stock. Historically speaking, the Intel punch back has all but killed AMD.
I’m not so sure the Intel punch back will be that bad this time. AMD seems much more ready to defend itself with a suite of next-gen chips. But, inevitably, Intel’s new chips in late 2019 will end the era of easy market share gains for AMD.
At that point in time, the rally in AMD will come to an end. How far AMD stock will fall thereafter is dependent on how much market share this company can maintain in the face of renewed Intel competition.
Bottom Line on AMD Stock
AMD stock has runway to rally for the next twelve months. But, once Intel launches new chips in late 2019, AMD will face some major turbulence.
As of this writing, Luke Lango was long AMD, INTC, and NVDA.
