Will Shares of Advanced Micro Devices Continue The Dizzying Run In 2017?
Shares of Sunnyvale, California-based AMD (NSDQ:AMD) delivered blockbuster returns in 2016. AMD stock nearly quadrupled in value over the year, going from under $3 at the start of the year to close the year above $11, recording a yearly gain of nearly 290%. After an exhilarating run, investors could be tempted to book profits here, but is now the right time to book AMD profits? What does 2017 hold for the company? I believe the company is on the verge of multiple high potential opportunities which could drive another solid year for AMD stock and its investors.
AMD's Strategy Is Finally Coming Together
The CPU and GPU business have come together at the same time for AMD. The recently released Ryzen CPUs and Radeon Instinct GPUs have been the best out of the AMD stable, in as far back as memory goes. The focus on machine learning could also provide AMD with new revenue streams from the data center (CPU as well as GPU) as well as the autonomous driving markets. These markets have, so far, been ruled by Nvidia (for GPUs) and Intel (for CPUs). Intel (NSDQ:INTC) has seen its data center group report nearly 7% YoY growth in FY 2016, with Q316 revenue registering a 10% YoY jump. On the GPGPU side, NVIDIA (NSDQ:NVDA) has seen its data center revenue accelerate by 121% YoY through the first 3 quarters of FY 2017 (ending in Jan 2017) while seeing its autonomous car revenue climbing by 58% YoY. In comparison, AMDs 'Enterprise, embedded and semi-custom segment' which includes revenue from server processors (AMDs limited exposure to the data center market), is up by 5.95% YoY (first 3 quarters of 2016).
The launch of the company's latest products will hopefully help the company leverage the rapid growth in the data center as well as AI markets (GPGPU demand). The recently launched Ryzen CPUs have done more than enough to impress early reviewers. The fact that AMD's zen architecture was built with a focus on heterogeneous computing, the Ryzen CPUs should benefit from future AI growth (which requires heterogeneous computing) while leveraging the computing power of Radeon Instinct, AMDs GPUs targeted at AI/machine intelligence. Every market where HPC is a need, AMDs Radeon Instinct can now compete with NVIDIA's Titan cards. Hence, a small share of the growing data center and AI markets could mean multiple new revenue streams for AMD. (See also: Deep Learning To Drive Huge Growth For Advanced Micro Devices Inc)
The Gaming Segment Could Get A Boost Too
Professional gaming is another segment which could benefit from AMDs latest GPUs. AMDs 'Computing and graphics' segment (which includes discrete GPUs and professional graphics) has trailed Nvidia's gaming segment for long. The disparities continued through the first 3 quarters of 2016, which saw Nvidia's gaming revenue swell by 35% YoY while AMD managed to grow the relevant segment by a meager 2.5% (this segment does include AMDs PC and notebook processors which haven't been doing too well, either). However, the latest Vega-based GPUs should help AMD drive growth in this segment once the latest GPUs hit the market. AMD is leaving no stone unturned to lure gamers as the company unveiled 17 “extreme performance” pre-built PCs designed around Ryzen at CES 2017. If early Vega reviews are to be believed, NVIDIA will surely have to work harder to earn its gaming revenues in 2017.
AMD has also worked over the recent quarters to deleverage its balance sheet and improve its cash position. Even though the current debt-to-equity ratio (D/E) of 4.2 is eye-popping, to say the least, AMD has worked itself out of a hole. The company had just over $2.24B (Long term +short term debt) in debt and a negative equity position at the end of December 2015. The company has paid off its short-term obligations worth $230M and $375M worth of long-term debt over the last 3 quarters. The net cash position (Cash - Debt) has improved from a negative $1.4B at the end of December 2015 to a negative $378M at the end of the last quarter. Hence, while AMDs balance sheet is still risky, the company is moving in the right direction. (See also: The Advanced Micro Devices Inc. (AMD) Stock Rally Is Not Yet Over)
Apart from the top line benefits of the new revenue streams, AMD's bottom line could certainly benefit from newer revenue streams. The fact that AMDs latest products are comfortably matching/outperforming the best from Intel/NVIDIA could also give AMD an exposure to the high-end CPU/GPU market. AMD has historically competed on costs at the lower end of the markets. AMDs bottom line record has been disappointing, without a doubt. An exposure and market share gains in the higher margin CPU/GPU markets will help turn around AMDs bottom line in 2017. AMD's profit margins will also be aided by lower interest expenses as a result of AMDs recent funding round. Hence, we expect AMDs profit margins to get a lift in 2017, driven by higher margin products as well as lower finance costs. This should continue to strengthen AMDs balance sheet.
Putting It All Together
AMDs recent product launches (Radeon Instinct GPUs and Ryzen CPUs) have been really competitive, matching the best of NVIDIA GPUs and Intel CPUs. This should help the company compete at the higher end of the GPU/CPU markets, which will aid AMDs profit margins in 2017. While the 2016 rally was driven by speculation, 2017 could see an earnings/fundamentals driven rally for AMD. Investors should seek out AMD stock as a high risk/high reward play in 2017. A failure of the new products to deliver results could see AMD stock collapse under the weight of current expectations. However, any meaningful success in the AI/datacenter markets accompanied by market share gains in the traditional CPU/GPU markets could see AMD stock deliver another year of blockbuster returns.
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