The recently unveiled ZEN CPUs Could Drive Advanced Micro Devices stock above $14 levels.
Sunnyvale, California-based AMD (NASDAQ:AMD) has been a favorite on Wall Street for the better part of last year. The stock has received multiple wall street 'rating' upgrades and price target hikes as the investing community focussed onto the company's latest CPU/GPU launches. The result of heightened expectations from the Zen based CPUs and Vega GPUs and bullish Wall Street commentary did not go unnoticed. Investors cheered as AMD stock nearly quadrupled in value in 2016. AMD stock price is, however, down 6.7% since the turn of the year and hence the question, Is it time to book profits? Or, better still, Is it time to load up on AMD shares using this dip as a buying opportunity?
AMDs CPU History
To understand what lies ahead for AMD stock, a short trip down memory lane, studying the company's most successful CPU launches will provide a perfect starting point, given the huge expectations surrounding the latest Zen based CPUs. The Athlon K7 (launched in 1999) and Athlon K9 (or dual core K8 as some call them, launched in 2005) were the most successful CPUs from AMD. The result was obvious for all to see as AMD took a bite out of Intel's market share on both the occasions. AMD gained over 20% market share in the CPU market, following the launch of the K7. More significantly, as reported by Michael Kanellos from CNET news, AMD gained share in the higher end market, following the K7 release. Quoting from the source, "In the U.S. retail market for PCs in the $1,000 to $1,500 range, AMD saw its market share go from 3.3 percent in May to 22.8 percent by September, according to figures from PC Data."
While K7 was probably the highest point for AMD, in its war with Intel (NASDAQ:INTC), the 2005 launch of the K9, or the dual core K8, wasn't far behind. AMD's CPU market share was above 40% for the whole of 2004, something it held onto till Q3 2006. AMD has experienced a constant erosion of its market share ever since and is currently sitting at less than 20% share of the CPU market. Can the new Zen based Ryzen CPUs propel the company's share higher? Early reviews and preliminary benchmarks look promising, which indicate that the latest AMD CPUs are better than their Intel counterparts. So what does this mean for AMD stock investors? (See also: Use This Dip To Buy Advanced Micro Devices Inc (AMD) Stock)
Analyzing AMD Stock Through The Valuation Lens
Having gained a basic understanding of AMDs history in the CPU market, we now come to two interesting questions: What could the promising Zen launch mean for AMD investors? Secondly, is there any further upside left following the massive run AMD stock has had over the last year or so?
AMD stock currently has a market capitalization of $9.81B (based on Jan 13, 2017 closing price). The stock has traded at a higher market cap during two periods in its history: Q2 - Q3 of 2000 and Q4 2005 - Q1 2007.
Interestingly, these high points coincide with the high points of AMDs CPU market share. The market has always reacted favorably in anticipation of higher CPU market shares. Given the hype which has been surrounding the Zen launch, it's not hard to see why the AMD stock price has been on a run. This brings us to the question of what is the potential upside considering the fact that AMD stock is already trading at nearly a $10B market cap. (See also: Advanced Micro Devices, Inc. (AMD) Could Dent Intel Corporation (INTC) In 2017)
In order to analyze the potential upside, we need to look at the valuation multiples of AMD stock. Considering the highly volatile bottom line of AMD, the price-to-sales ratio (PS ratio) will be our metric of choice to look at AMDs valuations. AMD stock has a current trailing twelve month (TTM) PS ratio of 2.1. To put things in perspective, AMD stock traded at a PS ratio of 3.9X at the peak of its rally in 2000 and 3.2X during the peak of its rally in 2006. Based on the TTM sales of $4.13B and a 3.2X PS ratio, AMD could hit a market cap of $13.23B, translating into a share price of $14.23, implying an upside of 34.5% over the last closing price. However, this estimate is a conservative estimate due to two factors: AMD has multiple potential growth drivers, apart from its CPU line-up, including the HPC driven demand for GPUs in AI/machine learning applications, highly competitive GPUs. Secondly, AMD sales could rise rapidly once the new line-up of CPUs and GPUs hit the market in the first half of 2017, which could lead to a further upside over the $14 price target.
Putting It All Together
AMD stock price has delivered monumental gains for investors over the last year. The strong run could force investors to question further upside potential. While profit booking could see minor pullbacks, investors should use the dips to buy AMD stock at lower price points. Considering the promising early reviews of the recently unveiled ZEN architecture based CPUs, the stock should continue to rise, going ahead. A $14 price target looks highly achievable, which should provide investors with over 30% upside from its closing price.
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