There’s no question at this point that Advanced Micro Devices (NASDAQ:AMD) has executed an impressive transformation. The question is to what extent that transformation is priced into Advanced Micro Devices stock. The AMD stock price currently sits at about 30x 2020 consensus earnings per share — a big multiple for the chip space.
But that multiple seems worth paying for one key reason: AMD has huge amounts of market share to take. With each passing quarter, its competitive position against long-time rival Intel (NASDAQ:INTC) gets stronger and stronger.
Recent news only supports the case, but the AMD stock price has still mostly moved sideways. Resistance around $34 has held after the stock touched a 13-year high last month. At some point — and likely some point soon — that resistance will give way. And Advanced Micro Devices stock, which traded at $2 less than four years ago, will resume its upward march.
The AMD Stock Price Soars — Kind Of
AMD’s Ryzen line of central processing units and its EPYC data center processors have made the company a legitimate competitor to Intel. Radeon graphics processing units have allowed the company to battle Nvidia (NASDAQ:NVDA) in that key market.
Again, these products have been transformative. Just a few years ago, AMD served mostly as a lower-cost option for PC manufacturers. It’s now a real competitor to two of the most innovative chipmakers out there.
And its improvements are continuing. The AMD stock price jumped 16% on Thursday after more good news on the competitive front. In announcing its EPYC Rome server CPUs, AMD announced that it had acquired Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Twitter (NYSE:TWTR) as data center customers.
Wins with two of the internet’s biggest companies obviously is huge for Advanced Micro Devices. It’s even more so given that the company almost certainly poached those customers from Intel. And it may be just the beginning.
So has AMD done the unthinkable? Beaten Intel by such a large margin that there is no contest? For now, based on our preliminary testing, that is the case. The launch of AMD’s second generation EPYC processors is nothing short of historic, beating the competition by a large margin in almost every metric: performance, performance per watt and performance per dollar.
Analysts in the industry have stated that AMD expects to double their share in the server market by Q2 2020, and there is every reason to believe that AMD will succeed. The AMD EPYC is an extremely attractive server platform with an unbeatable performance per dollar ratio.
With those kind of reviews, AMD may have many more wins ahead — particularly since Intel’s competing chip won’t be available until next year.
What’s Wrong with AMD Stock?
Even with that win, and the 16% one-day gain, however, the AMD stock price has mostly stalled out. And there are three potential concerns here.
First, its technicals don’t look great, for investors who follow the charts. Resistance keeps holding around $34. Indeed, I argued ahead of earnings that AMD stock could bust through that ceiling; it hasn’t done so yet. And as I noted last month, this is a stock that on occasion has fallen sharply and swiftly after hitting resistance in the past.
Second, as noted, valuation is pricing in quite a bit of strength as is. We’ve seen with the plunge in NVDA stock what can happen when a chip stock gets overvalued. This remains a cyclical industry, and yet Advanced Micro Devices stock isn’t quite priced as such.
Finally, AMD is taking market share — but there are questions about those markets. PCs still drive a decent chunk of sales. Intel and Nvidia highlighted first-half slowdowns in data center demand. Both companies expect an acceleration in the second half — and AMD management sounded confident on its second-quarter conference call — but a weaker-than-expected market could dim investor enthusiasm toward AMD stock.
Risks Worth Taking
Even with those risks in mind, however, AMD stock looks attractive back at $30. And there’s one broad reason why. AMD, even after the big gains of late, still has a market capitalization of about $33 billion. Intel, on the other hand, still is worth over $200 billion.
It’s too simplistic to say that AMD’s market share gains mean that it can take value from Intel. After all, both companies can move higher (or lower) depending on how overall end markets respond. And Intel has operations in areas like NAND flash, where AMD is not a competitor.
Still, from a very broad standpoint, the argument is simple: There’s a lot of Intel market share that AMD can take. And that means there’s a market opportunity worth multiples of the current AMD market capitalization. With Advanced Micro Devices still executing, and clearly set to take more share, there’s more value to be added — and more gains for AMD stock.
As of this writing, Vince Martin did not hold any of the aforementioned securities.
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