Advanced Micro Devices, Inc (AMD) Stock Could Fall Much Harder
The hype appears to be wearing off for Advanced Micro Devices, Inc. (NASDAQ:AMD). Despite a string of positive news events and favorable media coverage, AMD stock has stalled out. In fact, the stock recently reversed course after hitting $15 again and has since fallen 20%. AMD stock previously topped out at $15 in February, and it is looking like a bearish technical double top for the shares at this point.
Source: Matthew Rutledge via Flickr
Why has AMD’s rally stalled out? It starts with earnings, reported late last month. The numbers beat expectations and led shares to rally above $15. But within a couple days, shares fell back under $14 and have continued downward since then.
Earnings: Just Not Good Enough
AMD turned the corner in one positive way with this latest release. The company put in a positive EPS figure. As a reminder, AMD hasn’t earned a full-year accounting profit since 2011, and it rarely breaks even on a quarterly basis either. So Q2’s positive two cents of EPS is an encouraging sign. And AMD’s positive update to forward guidance didn’t hurt either.
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That said, it’s hardly sufficient to support the current AMD stock price. Annualize AMD’s quarter and they’d make a dime of earnings for the year, leaving the stock at a more than 100x PE ratio. Analysts have AMD at a 40x forward price-earnings ratio.
That is based on the assumption that earnings will pick up significantly heading into 2018. But this optimism may be misplaced, as we’ll see in a minute. And if earnings don’t pick up, there is little else that would support AMD’s stock, given its weak balance sheet and lack of a technological moat.
Next-Generation Sales Don’t Seem That Strong
Despite the strong earnings report, not all observers reacted favorably. Barclays’ analyst, for example, didn’t change their outlook following last quarter’s release. Barclays decided to stick with their underperform rating and $9 AMD stock price target. The analyst suggested that AMD’s strong earnings result came primarily from the cryptocurrency mining boom, rather than its improved CPU chips.
And that’s a real problem since most of the bull run in AMD stock was based on the idea that AMD was finally ready to pull ahead of its chief rival Intel Corporation (NASDAQ:INTC) in CPU chips.
However, the general consensus from various benchmarking tests is that Ryzen is merely on par with Intel’s latest chipset. And given the Intel has another next-generation set of processors on the way, Ryzen’s ability to merely pull even with Intel for a few quarters isn’t that inspiring.
AMD has moved the needle a bit in terms of market share. After years of steady erosion, AMD’s market performance is up slightly. Between 2008 and 2012 (data source), AMD’s share of the market held steady around 29%.
From 2012, this steadily eroded and recently fell below 20%. From its nadir at 18% last year, AMD has now moved back to 22.4%. That’s some improvement, but hardly a return to the 40%+ market share AMD had prior to 2006 when its chips were truly competitive with Intel.
In graphic cards, AMD also failed to live up to expectations. The Vega isn’t a bad offering by any means. But after so much R&D and positive talk, investors were hoping that the Vega would compete with Nvidia Corporation’s (NASDAQ:NVDA) GeForce GTX 1080 TI.
Now to be fair, the Vega can more than keep up with the ordinary 1080. That will be enough for many consumers. However, Vega is unlikely to make nearly as many inroads into the high end of the market as analysts had forecast.
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Mining Boom May Fade
If AMD’s new product launches aren’t going that strongly, what drove this quarter’s better than expected results? Unfortunately, it’s difficult to say exactly, since AMD doesn’t break out its revenues in great detail. However, Barclays suggests – and evidently many investors agree – that the strong sales may be a result of the current cryptocurrency boom.
Since March of this year, Ethereum has run up from $15 per coin to as high as $400 recently. Even after a correction, Ethereum has held its ground and now trades at $320, up 3,000% year-to-date.
This has, predictably enough, set off a fresh graphics boom. Mining organizations are rushing to buy the latest GPUs that are optimized for crypto-mining. With Ethereum prices currently so high, it has created a powerful tailwind for this type of demand.
However, it likely won’t last. When the price of something goes up 25x in a year, it tends to experience a serious correction, if not an outright bust, sooner or later. AMD CEO Lisa Su is well aware of this. In AMD’s latest conference call, she stated that: “I also think that we want to be cognizant of the fact that some of the graphics demand that we see might be temporal. So we’re not counting on that staying through the full year. We’ll see what happens. Frankly, I think we’ll see what happens with the whole mining stuff.”
AMD Stock Heading Lower For Now
She’s right to sound a cautious note on mining demand. But it’s terrible news for AMD stock. The market’s reaction to last quarter’s seemingly positive earnings shows exactly why.
It’s really disappointing for long-time AMD bulls that the company could only put up two cents of EPS in a quarter with exciting new product launches and a mining boom. Past mining booms have quickly faded, with cards purchased to mine Bitcoin and Litecoin quickly ending up on the second-hand market once mining profitability declined.
And there is little evidence that AMD’s new product launches elsewhere have finally lifted the company into a sustainable competitive position. Yes, its market share has advanced slightly. But that’s a far cry from having a competitive moat that will ensure ongoing profits.
This technological race continues to be a treadmill, and both Intel and Nvidia have far more resources to make sure they win the R&D battles going forward. With AMD stock appearing to have double-topped at $15 recently, shares could move sharply lower next quarter if earnings disappoint even slightly.
At the time of this writing, Ian Bezek owned INTC stock. He had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.
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