2018 has been a bumpy year for AMD (NASDAQ:AMD) investors. The stock rallied 25% in January, but subsequently fell almost 30% on concerns about the cryptocurrency market, fresh competition from Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA), and fears of new tariffs sparking a trade war with China.

But with AMD trading below $10 and 20% of its float being shorted as of this writing, we should reexamine the stock to see if investors have become too bearish. Let's take a look back at what happened to the chipmaker this year, and where its stock might be headed.

AMD's logo.

Image source: AMD.

What happened to AMD?

At the end of January, AMD posted solid fourth quarter numbers. Its revenue rose 33% annually to $1.48 billion, beating estimates by $70 million and marking its strongest growth since the fourth quarter of 2013. That growth was fueled by robust demand for its Radeon GPUs and Ryzen CPUs.

On the bottom line, AMD posted non-GAAP earnings of $0.08 per share, which beat estimates by three cents and marked its third straight quarter of profitability. AMD also forecast double-digit sales growth for the year, compared to analyst expectations for 12% growth, and expects its non-GAAP gross margin to expand from 34% to 36%.

Those numbers looked solid, but some investors anticipated higher GPU sales on rising cryptocurrency prices. Other investors were concerned that AMD's rising GPU and CPU sales would be throttled by next-gen chips from NVIDIA and Intel, and that its ramp up in the data center market (with its Epyc chips) remained in the early stages.

Why investors panicked

The situation got uglier when cryptocurrency prices started tumbling in January. AMD and NVIDIA cards are primarily used to mine alternative cryptocurrencies like Ethereum, which are generally more profitable than Bitcoin. Bitcoin miners usually use dedicated mining machines powered by ASIC chips instead of GPUs.

However, recent reports indicate that Bitmain, the largest ASIC mining machine maker in the world, will launch a dedicated ASIC-powered rig for mining Ethereum. That report prompted Susquehanna analyst Christopher Rolland to downgrade AMD from "neutral" to "negative" -- with a price target of $7.50 -- in late March.

A cryptocurrency mining rig.

Image source: Getty Images.

Rolland claims that crypto-related sales account for 20% of AMD's revenues and 10% of NVIDIA's revenues, which contradicts other analyst estimates and company reports. AMD doesn't disclose how much revenue it generates from crypto miners, but Jefferies analyst Mark Lipacis previously estimated that cryptocurrency demand generated just 5% to 6% of AMD's revenues during its third quarter -- not 20%.

As for NVIDIA, the chipmaker revealed that crypto revenues accounted for 7% and 3% of its second and third quarter revenues, respectively. It stated that its crypto sales for the fourth quarter were "difficult to quantify," but that they generated "a higher percentage of revenue" than in the third quarter -- which doesn't sound like 10% to me.

Crypto issues aside, AMD also struggled with security concerns. AMD mainly avoided the Meltdown bug that hit Intel chips, but its chips were still affected by the Spectre bug. AMD patched those vulnerabilities, but researchers at CTS Labs found 13 new flaws in AMD's Ryzen and Eypc chips in late March.

AMD stated that it was "actively investigating and analyzing its findings," but noted that CTS "was previously unknown to AMD" and that it was "unusual for a security firm to publish its research to the press without providing a reasonable amount of time for the company to investigate and address its findings."

But the bulls haven't abandoned AMD

If you think AMD investors overreacted to cryptocurrency fluctuations and Susquehanna's mining-related downgrade, you're not alone.

In early April, Stifel analyst Kevin Cassidy upgraded AMD from "hold" to "buy", claiming that investors "oversold" AMD "based on alternative cryptocurrency mining solutions coming to market." Cassidy also noted that AMD's "full line-up of PC CPUs" gave it a shot at gaining market share against Intel, and that its valuation looks attractive.

AMD's market share in desktop x86 CPUs rose from 9.9% to 12% between the fourth quarters of 2016 and 2017, according to Mercury Research. Its share of the GPU market also rose from 29.5% to 33.7% during the same period according to JPR.

As for its valuation, AMD trades at just 1.9 times sales, compared to the industry average of 4.3 for semiconductor makers. Analysts expect its non-GAAP earnings to rise 124% this year, which is a stunning growth figure for a stock that trades at 25 times forward earnings.

So are investors too bearish on AMD?

AMD still has a lot to prove, and there's no guarantee that it can keep gaining market share against Intel and NVIDIA. But AMD has fared well so far, and the crypto-related sell-off was unjustified and reduced the stock's valuations to attractive levels.

Therefore, I think the market is too bearish on AMD, but the bulls still face uncertain headwinds over the next few quarters.