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".6 Reasons To Buy AMD Now
Sep. 3, 2015 9:58 AM • AMD
Summary
At current prices, it takes very little good news to send the stock soaring, and a lot of bad news to lower it even slightly.
Q3 guidance was very low by AMD, and will easily be beaten.
AMD's GPU market share has bottomed, and will show market share increases in Q3.
For computer companies, there is no better indicator of future stock price than the technology they have. There are other factors, of course, but this is the most salient.
Some of the other factors include the price of the stock, and the history of how it reacts to news. The markets the company is in also play a role, as well as current expectations for the company.
I have said for well over a year, 2015 was going to be extremely difficult for AMD (NASDAQ:AMD), and the company has not disappointed with egregious losses, and very weak guidance. But, that put the stock where it is now. So, why write an article about why now is a good time to buy AMD? Part of it is that price.
At below $2, the stock historically has rewarded investors quite well.
At the time of this writing, AMD is selling for $1.77 a share. Yes, there are reasons for this, including a dismal 2015. Yes, there is heavy debt. Yes, the PC market is declining. Yes, AMD is not going to release any significantly new technology for probably a year. There will be people that will even show by this or that metric, AMD is actually expensive.
The reality is different, because judging the stock by common parameters ignores the enormous potential of the company. This is primarily because it is one of two companies (VIA is essentially irrelevant) that can sell x86 processors. The PC market is still huge, and so is the x86 server market, so this is an extremely important consideration.
The company is also one of two companies making powerful GPUs, which is also a very large market.
Because of this, the potential upside for a company with AMD's low market cap is enormous, and the market reacts very strongly to any positive news.
Put another way, it's much more likely AMD will double, than go to 0. We only need to look at the history of the stock price, even recently, to see this is patently true.
Intel (NASDAQ:INTC) is having problems significantly improving its products in the PC market.
We've seen Intel's 14nm process didn't improve performance much, if at all, and Skylake was only a very small improvement over Broadwell, which was a very small improvement over Haswell.
This is not to discredit Intel, it is likely the design is at the point where further improvement is very difficult. But, it also gives AMD a reasonable chance of creating competitive performance with the next generation Zen processor.
Keeping in mind this is a brand new design, on Samsung's (OTC:SSNLF) 14nm FinFET process, with a very well established processor designer (Jim Keller), it's essentially certain it will close the gap with Intel in 2016.
Clearly, right now is the best competitive situation Intel will be in for the foreseeable future, and will cease to be the case some time in 2016.
AMD is gaining traction with OEMs.
I wasn't expecting so many examples of design wins with Carrizo, so am still somewhat surprised by the announcements we keep seeing. While clearly not as good as Intel's best devices, nor in nearly as many designs, it still apparently performs well enough to be attractive at certain price points.
Perhaps the biggest example of this is AMD's ongoing relationship with Apple (NASDAQ:AAPL) with respect to GPUs, particularly with professional devices. This not only sells products, but does give AMD credibility, which it has lacked in the professional market.
It's also important to note that OEMs do not want AMD to disappear into irrelevance. They remember all too well Intel's behavior when completely in control, and a stronger AMD gives them better leverage.
It is also worth bringing up that AMD has pushed the market forward in a very positive way, with technologies like Mantle, HSA, HBM, FreeSync, etc.
This is not to suggest that OEMs are willing put out products they believe will not be attractive, just to help AMD. However, in close situations, this bias can have some impact.
AMD's Q3 guidance is very low.
One of the more egregious aspects of AMD's Q2 conference call was the very light revenue guidance for Q3, indicating a 6% revenue increase. Considering Q2 had several non-recurring negative factors, and Q3 is seasonally the strongest for console chips, this guidance not only can be, but will be, beaten.
One of those negative factors was the impact of Windows 10. Lisa Su mentioned in the conference call that some design wins had been delayed from Q2 to Q3 because of this. Also, although it's not clear whether Windows 10 will promote significant customer purchases, we do know OEMs leaned out inventory in anticipation of its release. Those inventory levels should increase slightly, and return to normality.
Another significant improvement in Q3 will be that AMD finished clearing out downstream channel inventory in Q2, which negatively impacted sales.
Q3 will also be the first full quarter that Carrizo is generating revenue, and given the number of OEM design wins, this should improve AMD's situation in the PC market slightly.
Perhaps most importantly, towards the end of Q2, AMD released significant GPU products. This included not only the Fury line, but also the R9 3xx series of cards. While the latter are relatively minor refreshes, buyers often delay purchases when new releases are imminent. This is not only true for those who are considering the newer product, but also for those who believe the price for the current product will go down when the newer ones are released.
AMD GPU technology is much stronger in Q3 than it was in Q2.
Much of this is perception, but not all. The Fury line appears to have moved past the supply issues it had, and in any event will be available for the entire quarter, not just the very end. Also, the Fury Nano is an extremely attractive product. It is just my opinion, and time may prove it false, but the Nano could easily be the most successful of the Fury products, despite it being largely viewed as a niche product. Why? It's elegant. It's efficient. It's powerful, without being power hungry. It's also taking the best dies, cherry picked to perform well even with lower power. Although the price is high, AMD finally has a product better at many things than NVIDIA (NASDAQ:NVDA), at any price. It's a great product, with performance per watt parameters that greatly exceed anything AMD had prior to this.
I doubt the GPU virtualization technology AMD released is going to have a huge sales impact, as it's a niche within a small market (professional graphics), but it does improve AMD's feature set, and how it is perceived. This is also something that could become more important as support around it develops, and scenarios become more visible.
Last, and most importantly, DX12 has dramatically changed the relative performance in the mainstream PC market. If you wondered why AMD beat NVIDIA to win consoles, one reason was the GPU architecture was more intelligent, and more flexible. With relatively weak CPUs, this was particularly important in consoles.
Many thought AMD's win in consoles would correlate to better support in PC games. If this happened, it was never apparent. The reason seems more clear now; console developers had to use more efficient APIs on their consoles, whereas they were confronted by the considerably different, and less efficient DX11 on PCs.
It also gives a much clearer picture of AMD's strategy. This is a very intelligent, coherent plan, although it sometimes did not appear so due to the lack of information we had.
Considering the lead times, it's very possible AMD developed GCN fully aware it would be used in situations where the processor was not very powerful. Of course this is the case in the consoles. As mentioned, this was likely an important consideration for both Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT). With Microsoft either unable to, or unwilling to, move to a more efficient programming model in the PC market, AMD essentially forced them to by developing themselves, and making it broadly available. Microsoft certainly did not wish to lose control over the API, which would have made code less difficult to port to other platforms, so were forced to offer something comparable.
NVIDIA made their hardware much more tuned for Microsoft's than current software environment. This allowed greater efficiency than AMD's products, which had powerful features which could not be utilized effectively, and thus took up space and used power to poor effect. Even so, this was not a mistake, as the consoles were worth it.
DX12 has changed this materially. At first, I wanted to see more benchmarks, even though all indications were that DX12 should perform better on AMD hardware, relatively speaking. The spat between NVIDIA and Oxide further validated this assessment, clearly indicating the weakness of NVIDIA's technology with DX12.
There is little or no doubt that AMD will gain market share in Q3 from NVIDIA, for all these factors. Although DX12 games will be few and far between initially, AMD products are more "future-proof", in a sense. Also, because companies have been using features like Asynchronous Computing on consoles for quite some time, it's reasonable to expect an easier learning curve than would otherwise be the case. The perception that AMD is better for future software environments, makes for a much more favorable impression than the company had in Q2.
The long-term reward justifies the risk.
As many know, AMD will be releasing a completely new x86 design called Zen in 2016, as well as a new GPU architecture, both on FinFETs. While we do not currently know the performance, should Zen be competitive, AMD's prospects will change enormously. The current situation, where Intel's "Core" processor line is greatly superior, allows AMD little hope of improving significantly in the PC market. There's little doubt Zen will, minimally, significantly close the performance gap, which in itself would help AMD's position. Should the performance gap be eliminated, or quite small, the opportunities for the company are so significant, the stock could go up many times its current price.
It's also well known that AMD GPU technology is very old, with Fury being just a tweaked Tonga, and Tonga just a tweak itself. 2016 should bring with a significantly redesigned GPU. It will also bring with it greater DX12 adoption by game makers. These offer an excellent opportunity for substantial growth.
We do not currently have a clear indication of how attractive either technology will be, but the cost to throw the dice is very low, compared to the reward if they land right.
All in all, for all the above reasons, this is a very good opportunity to invest in AMD. While there are always risks with any stocks, they pale in comparison with the potential awards at the current price.
Disclosure: I am/we are long AMD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article."
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