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Is It Time to Hold Your Horses on AMD Stock?

Advanced Micro Devices AMD stock has been soaring over the past month, so it’s worth taking a look at whether there’s more upside to the stock.

It’s not just the slew of positive news stories surrounding the name, but also the company’s growing stature as a key deliverer of semiconductor innovation; not just dependent on short-term phenomena like cryptocurrency mining but able to take longer term lead in cloud-based gaming, server technology and yes, even on the latest manufacturing process. So AMD has come a long way and there’s good reason to be bullish on the stock.

The Bull Story

The first sign of a company poised to do better is management delivering on its promises. That’s precisely what happened at the Computex trade show in Taipei where AMD delivered on its promise of new products to challenge market leaders.

So we saw CEO Lisa Su announce the 7nm Rizen 3000 series CPUs that are expected to take share from Intel INTC and the RX 5000 series GPUs that will take on NVIDIA NVDA, all of which remain on schedule to launch at various times during the second half of the year across its entire product lineup.

Compounding the effect is the slowdown in innovation at Intel, which still remains a market leader.

Third is the question of market share. According to estimates released by Mercury Research, AMD managed a 13.3% share of the X86 processor market in 1Q19, up from 8.6% share in 1Q18. It had a 12.3% share in 4Q18. Importantly, it saw a 4.7 point gain in overall market share over the year-ago quarter, including a 4.9 point share gain in desktops, a 5.1 point gain in laptops and a 1.9 point gain in servers.

It’s still a relatively small player however (17.1% share in desktops, 13.1% share in laptops and 2.9% share in servers). Its server market share is expected to pick up this year helped by new products and as earlier indicated by Intel’s CEO.

As far as the discrete GPU market is concerned, AMD made a 2.3 point gain in share, according to JPR Research, mainly because it saw the lowest shipment decline: while the market shrank 18.6%, Intel parts shrank 22.5%, NVIDIA 12.7% and AMD only 4.6%. The whole market was thrown out of gear because Intel was unable to deliver as promised, which threw the supply chain out of balance, given its size.

Perhaps the biggest driver of the share price was the number of lucrative partnershipsthe company has been able to rack up. The partnerships signal AMD’s growing prowess, legitimize its seat at the leaders’ table and indicate that it’s in the beginning of a multi-year growth phase.

First up is the announcement that Apple’s AAPL all-new Mac Pro to launch this fall will come equipped with Intel CPUs but also AMD’s latest generation 7nm Radeon Pro Vega II GPUs. AMD tech is expected to support 8K video, rendering, complex video effects and more in these devices.

What may have a relatively small impact on revenue but is significant nonetheless is Samsung’s multiyear agreement to license AMD mobile graphics chip technology. Licensing fees are important because they supplement the product business, which depends on other factors as well, such as the heath, capability and capacity of AMD’s foundry partners. One analyst estimates that this could account for around 5% of annual revenue.

It was also recently announced the company’s agreement with Alphabet GOOGL, which will be using AMD custom GPUs in its Stadia cloud gaming project.

Cloud gaming is in its infancy with the biggest positives being that it allows people with limited computing resources to play all games in the cloud, play cross platform, stream to TV, play instantly (without downloading first, which can take a long time), protect copyright (since the game is never on the device in the first place) and online game playing support (since it allows easy spectatorship).

The more advanced players are likely to stick to their devices for now, as there are of course latency issues and rendering may not be comparable. Plus, what you save on your computing resources, you may make up with bandwidth and data cost. These are the issues that will be ironed out over time.

Meanwhile, Microsoft MSFT has also been working with AMD for its own cloud gaming effort that may be announced as early as next week at E3. AMD’s position at game console makers is likely playing a big role here.

The company is also working with the U.S. Department of Energy, Oak Ridge National Laboratory and Cray CRAY to deliver its supercomputer dubbed Frontier to the lab in 2021.

Key numbers are generally positive. In the last quarter, the company reported a small surprise on both revenue and earnings. Its 2019 EPS estimate is practically unchanged in the last 12 months, but the estimate for 2020 is up 27.0%.

But There Are Some Risks

The good news looks priced into the stock. Its forward 12-month price to earnings ratio of 44.48X is higher than its median value of 39.89X over the last 12 months and the S&P 500’s 16.34X, which is below its median value of 16.72X.

The price to sales ratio also doesn’t look encouraging. The stock’s current 5.71X is ahead of its own median value of 3.83X and the S&P 500’s current value of 3.16X.

This could mean volatility in share prices despite the many positives.

The other factor we probably can’t overlook is the cyclicality of the semiconductor business and the fact that it won’t be possible for AMD to reach its full potential while the rest of the market remains in a down cycle. There is unlikely to be a recovery here in the short term.

We also need to keep in mind AMD’s fabless model and the capacity constraints at foundry partner Taiwan Semiconductor TSM. Any slipup on TSM’s part would affect AMD’s execution.

Conclusion

AMD’s innovation will without a doubt lead to continued share gains (at least in the near term), which will come hand in hand with stronger margins and improved profitability.

But given the huge run-up in prices, it’s probably a good idea to hold your horses now, especially since there are plenty more fish in the sea.

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