AMD Stock: Why The Alibaba (BABA) Deal Is Big For Advanced Micro Devices, Inc.

  • AMD will benefit considerably from the collaboration with e-commerce and technology giant Alibaba.
  • AMD has gained significant market share from NVIDIA in the graphics add-in card market in the second quarter of 2016.
  • The average top analysts' target price is $6.13. But in my opinion, AMD stock can go much higher.

Last Friday, October 14, AMD (NSDQ:AMD) surprised the market by announcing a collaboration with Alibaba, where the latter will use AMD's Radeon Pro GPU technology platform in Alibaba's cloud servers. As a result, AMD shares surged 4% to close at $6.75, after reaching as high as $7.12 during trading on the same day. AMD stock has soared in 2016, already up 135.2% since the beginning of the year. Here's why it can go higher.

Also Read: Can Q3 Earnings Propel AMD Stock To $8?

The collaboration with e-commerce and technology giant Alibaba could significantly benefit the company. After all, Alibaba, is also an important player in the Chinese cloud infrastructure market. According to Alibaba, the collaboration with AMD will bring more diverse graphic processing solutions to Alibaba's cloud computing arm, while AMD President and CEO Dr. Lisa Su commented on the agreement saying:

“The collaboration between AMD and Alibaba Cloud leverages the world-class technology and software engineering capabilities of both companies to meet the growing demand for standards-based GPU computing solutions capable of enabling more immersive and intuitive cloud services. Working closely with industry leaders like Alibaba Cloud helps ensure the investments AMD is making in our high-performance graphics and computing datacenter products continue to align with the needs of the broader cloud market.”

As I see it, the partnership with Alibaba could also help AMD to continue gaining market share in the growing market of server GPUs, where NVIDIA (NSDQ:NVDA) has been the dominant player. NVIDIA has also done very well in 2016, and its stock has soared 100.2% since the start of the year.

AMD is Gaining Market Share in Graphics Add-in Card Market

According to reports by Mercury Research and by Jon Peddie Research, AMD has gained significant market share from NVIDIA in graphics add-in card market in the second quarter of 2016. In terms of total units shipped, AMD had achieved around 30% market share in the second quarter, while its market share was 22.8%  in the previous quarter, and only 18% at the end of 2015. That is, by all means, a very significant achievement that could indicate a growing trend for AMD. What's more, second quarter results do not include the new Polaris-based graphics cards like the Radeon RX 480, which could increase AMD's market share even more.

What To Expect From AMD's Earnings Report

Advanced Micro Devices is scheduled to report third quarter financial results on Thursday, October 20, after markets close. According to 17 analysts' average estimate, earnings per share is expected to be around zero. The company posted a loss of $0.17 per share in the same quarter a year ago. The highest estimate is for a profit of $0.02 a share, while the lowest is for a loss of $0.02 a share. Revenue for the third quarter is expected to increase 14.3% year over year to $1.21 billion, according to 20 analysts' average estimate. There was one earnings per share upward revision during the last seven days and five earnings per share upward revisions during the last 30 days. Since AMD has delivered an earnings per share surprise in three of its most recent quarters, there is a good chance that the company will beat estimates also in the third quarter.

Also Read: Tempted To Short AMD Stock? Think Again

AMD Fiscal 2016 Financial Goals

According to the company, it expects revenue to increase by low single digits in the fiscal year 2016. AMD also expects positive free cash flow for the year. The company had cash and cash equivalents of $957 million at the end of the second quarter compared to $716 million at the end of the first quarter of 2016, and it expects cash and cash equivalents between $600 million to $1 billion at the end of the year.

AMD Stock Performance

Since the beginning of the year, AMD stock is already up 135.2% while the S&P 500 Index has increased 4.4%, and the Nasdaq Composite Index has gained 4.1%. However, since the beginning of 2012, AMD's stock has gained only 25%. In this period, the S&P 500 Index has increased 69.6%, and the Nasdaq Composite Index has risen 100.1%. According to TipRanks, the average target price of the top analysts is at $6.13, which indicates a downside of 9.2% from its October 14 close price. However, in my opinion, AMD's stock can continue to climb.

Conclusion

In my view, AMD is well positioned to considerably benefit from the collaboration with e-commerce and technology giant Alibaba. As I see it, the partnership with Alibaba could also help AMD to continue gaining market share in the growing market of server GPUs, where NVIDIA has been the dominant player. According to reports, AMD has gained significant market share from NVIDIA in graphics add-in card market in the second quarter of 2016. Despite that, the average top analysts' target price is $6.13, in my opinion, AMD's stock can go much higher.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and AMD stock

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Ron Deb
neutral
Couldn't gree more with you with you Arie Goren. I was going to buy NXP but where to high already in the 80's. I like to catch great catch when the buy price is about to take off. And when Alibaba saw the potential and have planned to group up with AMD. The one obstacle in their way has been solved. Cash. So now look out. Zen also coming out soon. AMD is looking to be a great buy at $6.52
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arigoren
neutral
Thanks Ron for sharing your interesting ideas about AMD.
Do share this awesome post