Shares of Advanced Micro Devices (AMD 2.73%) have exploded since bottoming out in early 2016, gaining an astonishing 650% since hitting its lowest point 17 months ago. Anticipation has been the main driver of these gains, with investors betting that a slate of new products would return the company to its former glory.
Ryzen, AMD's new line of PC CPUs, launched in March, with high-end chips coming first and mainstream chips coming later. EPYC, AMD's latest foray into the server chip market, was detailed last month. And Vega, the company's first serious attempt at a high-end GPU in years, is now available in a professional card, with gaming cards coming soon.
The stock has been volatile in 2017, with the price swinging up and down due to product launches and for various other reasons. A thoroughly debunked rumor that AMD had licensed its graphics technology to rival Intel (INTC 1.73%) drove some big gains and some big losses, and graphics card shortages created by intense, but likely ephemeral, demand from cryptocurrency miners have been pushing up the stock in recent months.
Trading around $14 per share, AMD's stock price already bakes in quite a bit of optimism. During AMD's analyst day event in May, the company laid out its long-term goal of producing $0.75 in adjusted earnings per share by 2020. The stock already trades for around 18 times what AMD hopes to earn three years from now, so for the stock to rise further, AMD will need to outperform its own expectations.
There are plenty of reasons why AMD stock could tumble from here, and an optimistic valuation is one of them. But if Ryzen, EPYC, and Vega gain more market share than expected, the stock could move higher in the long run.
Both high-end Ryzen 7 and mainstream Ryzen 5 desktop chips are already available. Threadripper, AMD's 12 to 16 core flagship high-end CPUs, will be available in August, and the low-end Ryzen 3 chips are expected to launch soon. Ryzen Pro CPUs aimed at enterprise users launched earlier this month, and the first laptops featuring Ryzen Mobile chips will be available during the second half of this year.
With Ryzen, AMD is betting that offering more cores at lower price points compared to Intel products will offset the disadvantage the chips have when it comes to single-threaded performance. The 16-core Threadripper CPU, for example, will cost $999, compared to $1999 for the soon-to-be-launched 18-core Intel Core i9-7980XE and $999 for the 10-core i9 7900X.
The Ryzen chips that have launched so far come with trade-offs. Gaming performance is mixed, in part due to weaker single-threaded performance compared to Intel chips, while performance in applications that make full use of the extra cores is stellar. Ryzen has certainly put Intel on the defensive, but it's far from a knockout blow.
AMD's market share gains with Ryzen will be gradual, but if the company can take back a meaningful portion of the market over the next few years, especially at the high end, the bottom line will get a nice boost. Some market share gains are already baked into AMD's 2020 earnings guidance, so it will take gains beyond those expectations to justify a higher stock price. That will be easier said than done, but it's certainly possible.
AMD's server chip market share is essentially zero, as its products haven't been competitive in years. EPYC, formerly known under the code name Naples, is AMD's attempt to break back into the market. Details were unveiled in May, and by all indications, it looks like EYPC has a good shot at making AMD a meaningful player in the server chip market once again.
Intel has already announced and launched new Xeon server chips to combat this threat, boasting that it's already sold 500,000 of its Xeon Scalable chips to large customers. AMD will look to undercut Intel when it comes to price to performance, but like Ryzen, Intel's superior single-threaded performance will act as a headwind.
AMD will win some market share, but it will be a slog clawing away sales from Intel. Even optimistic analysts with buy ratings on the stock are being realistic. An analyst from Jefferies, for example, expects AMD to claim just 7% of the total server market by the end of 2018.
But even small gains in market share will boost revenue and earnings. Again, AMD's 2020 earnings guidance assumes some market share gains already. But if EPYC can outperform those expectations, a higher stock price might be in the cards.
Polaris, AMD's mainstream GPU launched about a year ago, led to some market share gains but not much else. AMD's computing and graphics segment remains unprofitable, and the Polaris graphics cards have made little progress winning over gamers, according to Steam's hardware and software survey.
The high end of the graphics card market belongs entirely to NVIDIA, a situation that was unchanged by AMD's last attempt to launch a high-end card in 2015. Vega could be a different story. The Vega Frontier Edition, the only Vega graphics card available at the moment, is aimed at professional users. The gaming versions are expected to launch in the next few months.
AMD may have a tougher time winning market share in the GPU market compared to the CPU market. While Intel has enjoyed years of essentially no competition at all, a situation that appears to have led to overconfidence on Chipzilla's part, NVIDIA has been pushing the envelope, driving hard to make its GPUs the standard for artificial intelligence, self-driving cars, and other non-gaming applications. It's unlikely that Vega will catch NVIDIA off guard.
But like the server market, AMD has no real presence in the high-end GPU market, so even modest market share gains would be a major positive. It's unclear how much market share AMD expects to win over the next few years, but if Vega can outperform those expectations, the current stock price may not be optimistic enough.