AMD's Radeon Pro WX7100, powered by the Polaris graphics core. Image source: AMD.

Advanced Micro Devices (AMD -5.44%) is on a massive roll right now. Share prices have more than quadrupled over the last 52 weeks, and AMD stock is trading at prices not seen since 2007.

Investors are loving this rare return to form, but is it too late to jump aboard the AMD bandwagon? Let's have a deeper look at the risks involved in an AMD investment.

The good

There's no doubt AMD has done a lot of things right in 2016. The company deserves kudos for the strong launch of a new graphics platform formerly known as Polaris. Even though graphics-segment arch-rival NVIDIA (NVDA -10.01%) also bowed a fresh graphics platform to an equally warm welcome, Polaris chips made AMD an instant challenger in the supercomputing and data center markets. Yes, chips designed to handle digital graphics tasks happen to be great at other forms of intense number-crunching as well. So Polaris has opened a bunch of new doors for AMD.

In the words of CEO Lisa Su, AMD is now a high-performance computing company more than anything else. She is aiming her Polaris platform at a global market worth about $50 billion a year, including data center servers and immersive digital experiences. The company is only getting started on a multiyear roadmap, which includes a new general processing architecture launch in 2017.

These are the reasons AMD shares are trading near decade-spanning record prices today.

The bad

The shift into high-performance computing has not been completely smooth. Along the way, NVIDIA won the lucrative contract to power the next Nintendo (NTDOY -1.16%) console. Nintendo has been in AMD's pocket since the original Wii system, helping the company keep its proverbial nose above the water in recent years.

NVIDIA might also pose a serious challenge when the other console builders get around to launching the next generation of hardware systems. If so, about half of AMD's current revenue sources could be headed to NVIDIA instead. Sure, AMD could still win those contracts and keep its sales streams fairly intact, but losing Nintendo is not a positive sign in the early going. Investors must be prepared for the potential of a big setback here.

The ugly

The thing is, investors are acting as if AMD were set up to deliver a steady stream of sustainable profits from here on out. And that's not even remotely true.

The company only occasionally manages to deliver positive operating profits, EBITDA earnings, or free cash flows. In general, you can expect the bottom-line numbers to show up deeply in the red. The overall trend isn't even positive.

AMD is sacrificing top-line revenue to explore new markets. That kind of move is usually expected to come with stronger profit margins, but not in AMD's case. Buying this stock today -- or holding on to your existing shares -- amounts to a bet on AMD's future prospects. The Polaris-based graphics boost needs to have legs, or the bottom falls out. On top of that, it's not enough to just maintain whatever positive trends the company has on the table today. AMD is still losing money by the bucketful, and it needs to tighten up the leaking ship.

Deliver on all of these promises, and AMD shares will hold steady -- or maybe rise even higher. Fall short anywhere at all, and that's the end of the new golden era.

Yes, this stock could skyrocket over the next several years if management executes flawlessly. But in my view, the chances of that happening are slim to none. It's a small boat in a big sea, surrounded on all sides by rivals with more experience and stronger balance sheets. AMD simply can't afford any mistakes, and perfection doesn't come easy.

Long story short, AMD investors will need an iron stomach.