AMD’s stock at a glance
Advanced Micro Devices (AMD) stock has been on semiconductor (SMH) investors’ radars since 2016. After growing more than 400% in 2016, the stock witnessed some correction in 2017 as many investors booked profits. This correction was likely because AMD operates in a highly cyclical semiconductor industry and has weak fundamentals compared to competitors Intel (INTC) and NVIDIA (NVDA).
Opportunities and risks
AMD is barely breaking even because of its high operating expenses and high leverage. Even so, the company has significantly improved its financial situation from nearing bankruptcy to breaking even in less than two years. The company is currently in the midst of multiple product launches targeting various markets such as gaming, cryptocurrency mining, and cloud computing. The company’s small size and limited resources give it little margin to make mistakes.
At the same time, AMD’s highly competitive products place it in a position to tap growth in the semiconductor industry. For instance, AMD’s GPUs (graphics processing units) compete with NVIDIA’s. In some sectors like blockchain and cryptocurrency, AMD’s GPUs beat NVIDIA’s GPUs. The strong GPU demand from cryptocurrency miners helped AMD’s and NVIDIA’s revenues rise 24.7% and 14.6% sequentially in 2Q17.
Correlation between revenue growth and stock price gain
AMD’s market share rose in both the CPU (central processing unit) and the GPU market in 2Q17. Market share is a zero-sum gain where one company’s loss is another’s gain. In the CPU market, Intel and AMD are the only two players, and any market share gain by AMD results in equal share loss by Intel. Similarly, in the discrete GPU market, AMD and NVIDIA are the only two players. A change in market share determines the relative growth rates of the two companies.
After the fiscal 2Q18 earnings call, analysts raised NVIDIA’s fiscal 2018 revenue estimates by 2.3% from $8.1 billion to $8.3 billion, representing YoY (year-over-year) growth of 20%. At the same time, analysts also raised AMD’s fiscal 2017 revenue estimates by 2% from $4.7 billion to $4.8 billion, representing YoY growth of 13%. Analysts raised Intel’s fiscal 2017 revenue estimates by 0.5% from $59.9 billion to $60.2 billion, representing YoY growth of 1.4%.
AMD’s revenue growth rate is higher than Intel’s but lower than NVIDIA’s. Similarly, AMD’s stock price growth is higher than Intel’s but lower than NVIDIA’s, as the above graph shows. Thus, the prices of these three stocks are based on their revenue growth potential instead of current earnings.
Next, we’ll look at AMD’s stock price movements and factors driving the momentum.