Chip designer Advanced Micro Devices (AMD -5.44%) has never sported a particularly steady stock chart. Share prices quadrupled in 2016 only to trade 9% lower in 2017. This year, AMD is back to its old high-growth ways, sending the stock 22% higher year to date.

But where is this crazy chart going next? Is it time to buy into AMD before the next skyrocketing growth spurt arrives, or will you be just fine on the sidelines?

Let's have a look.

What's going on?

AMD works in a cyclical industry, and things have been swinging upwards in recent quarters. Revenue and earnings have been marching higher almost exactly in tandem, powered by strong demand for AMD's Ryzen processors and Radeon graphics chips.

AMD Revenue (TTM) Chart

AMD revenue (TTM). Data by YCharts.

Graphics processors are not always used to draw up eye candy for computer games or professional graphic designers, of course. They also happen to be great at the kind of number-crunching you need in order to run an effective cryptocurrency mining rig. These days, some of the most popular digital currencies have had their Radeon-based mining replaced by specially designed mining chips, but other currencies have stepped in with technical requirements that were designed with graphics processors in mind.

So AMD tapped into the cryptocurrency craze of 2017 in a big way. Management doesn't really want to talk about it, but crypto-mining enthusiasts helped drive those beautiful revenue trends way up last year.

The cryptocurrency problem

Riding the coattails of popular buzzwords like crypto mining isn't exactly a sustainable strategy, which explains why CEO Lisa Su is so quick to turn every cryptocurrency conversation into an exploration of data center computing or solid demand from actual video gamers. The fear here is that AMD's shares are floating on a temporary trend, and when cryptocurrency mining goes out of style, that growth driver goes away in a hurry. And down comes the inflated stock price.

AMD's management knows this, analysts know it, and regular investors are aware of it, too. The bulls have a couple of choices here:

  • Argue that crypto mining really isn't that big of a revenue driver for AMD, so it wouldn't hurt too much if that trend loses steam.
  • Hope that there will always be a strong market for blockchain mining through AMD's and NVIDIA's (NVDA -10.01%) graphics cards.
  • Note that the stock didn't rise at all in 2017 even though sales and profits were surging at the time, leaving share prices spring-loaded for a big surge later on -- maybe right now, even.
Two young businesspeople staring at a computer monitor with a look of concern on their faces

Image source: Getty Images.

Let's rebut those points

Su admits that it's hard to separate gaming card sales from cryptocurrency mining uses, since the exact same products are used for both purposes. It's not like you have to walk up to your local electronics store and ask for a Radeon-based mining card -- just pick the gaming card you want and put it to work.

So when she says that crypto-related sales might make up a single-digit percentage of AMD's quarterly sales, I find that hard to believe right now. Store shelves were cleared out in suspiciously tight correlation with spiking interest in digital currencies last year.

I do believe that blockchain technologies are here to stay and that cryptocurrencies should play a large role in that ecosystem for many years to come. But even as some currencies intentionally cater to graphics-card enthusiasts, others are taking mining entirely out of the equation. There are other ways to run an effective blockchain or cryptocurrency, and well-known coins like Ripple or NEO cannot be mined at all. Their systems just aren't set up that way, and all of their coins come from a central authority that pre-mined everything before making their currencies public.

The current trend in this field is that the developers behind many mining-based coins are thinking about moving away from traditional mining models. So even in a world where cryptocurrencies rule the roost all around the world, there might still not be a place for blockchain miners of any kind. There's some guesswork involved here, but the mere fact that we have to start guessing should send up red flags for serious investors.

Finally, I might actually agree with the third point. AMD is barely profitable and therefore difficult to value at this point, but the company's bottom-line trends are indeed moving in the right direction. As a result, it should get easier to place a reasonable value on this stock as the business model starts to produce sustained and significant profits.

You still can't forget about that monstrous 2016 performance, though. AMD investors put the horse before the cart that year, raising share prices in anticipation of upcoming good news. The company delivered last year but didn't exactly stun the market. So here we are, with no market momentum but plenty of underlying business strength.

All told, I'm still not convinced that AMD has delivered on all the promises that were implied by that huge market surge in 2016. I'm content to watch this stock from the sidelines, keeping track of cryptocurrency trends and the next round of new product introductions to get a better sense of where share prices might go from here.