Prior to 2017, Advanced Micro Devices (NASDAQ:AMD) was stuck. In the CPU market, AMD's products were vastly inferior to those of market leader Intel (NASDAQ:INTC). In the GPU market, NVIDIA (NASDAQ:NVDA) was overwhelmingly dominant.
AMD is still in second place across the board, but the company is now on the rise. The launch of its Ryzen PC CPUs in 2017 and its EPYC server CPUs based on the same underlying technology has put Intel on the defensive. And while NVIDIA still leads the GPU market, AMD came out with its most competitive GPU product in a long time last year.
AMD stock has more than doubled over the past year. The reason for this rally is simple: Investors are expecting big market-share gains and rapid earnings growth.
Ryzen is a winner
AMD is now on its third generation of Ryzen CPUs for desktop PCs. Those chips were launched in mid-2019. While Intel has maintained a small advantage when it comes to single-threaded performance, important for any application that doesn't scale well with core count, third-gen Ryzen offers a better value proposition for a wide variety of PC users.
AMD's third-gen Ryzen chips are built using a top-of-the-line 7nm manufacturing process from third-party foundry Taiwan Semiconductor Manufacturing. Combined with Intel's continued struggle moving away from its aging 14nm manufacturing process, this allowed AMD to dramatically close the performance and efficiency gap. AMD's share of the desktop CPU market hit 18.3% in the fourth quarter of last year, nearly doubling in three years.
AMD is also making a stand in the laptop market. The company launched its Ryzen 4000 Mobile line of chips this year, and while it will take time for more systems using the chips to become available, reviews have been generally positive.
Although Intel is well entrenched in the PC CPU market, AMD should be able to continue to chip away at its market share in the coming years.
EPYC has potential
It's been slower going in the server CPU market, but the company is making progress. AMD's EPYC chips are competitive with Intel's server chips, something that couldn't be said about AMD's pre-EPYC products. But it takes time for OEMs to build systems around new chips, and it takes time to persuade internet giants that design their own data center hardware to jump on board.
AMD had a 4.5% unit share of the server CPU market in the fourth quarter of last year. That seems like next to nothing, but what's really important is how far AMD has come. Its server-chip market share was just 0.8% in the fourth quarter of 2017.
Intel is not going to sit idly by and let AMD steal sales in its most lucrative segment, so winning considerable market share may be more difficult for AMD compared with the PC market. But the company benefits from being able to offer customers a viable non-Intel option, which wasn't available for years as AMD struggled.
If AMD can get its share of the server CPU market into double digits, EPYC could become a major driver of profits.
Catching up to NVIDIA
AMD launched the RX 5700 and RX 5700 XT graphics cards last year, priced at $349 and $399, respectively. Those products made AMD competitive in the below-$400 portion of the graphics card market.
The company plans to eventually debut high-end graphics cards that can compete with NVIDIA's pricier products, but for now it is largely shut out of that part of the market. AMD's previous attempts to break into the high end have largely failed, but NVIDIA's strategy of pushing up prices with each generation could give AMD an opening.
If AMD can successfully break into the higher-end portion of the graphics card market and legitimately challenge NVIDIA, its GPU business could become a lot more profitable.
Why the rally may not hold
AMD is doing a lot of things right, but the stock already has a lot of success priced in. The company generated adjusted earnings per share of $0.64 last year, which puts the price-to-earnings ratio above 80. While it's certainly possible for AMD's bottom line to grow quickly enough in the long run to justify this valuation, the bar is set quite high.
It's hard to say what the stock will do, but it is safe to say that AMD is well positioned to win additional market share from Intel and NVIDIA. Only time will tell whether those gains will be enough to continue the rally in AMD stock.