As the old saying goes, if you play with fire, sooner or later you’re going to get burned. All the recent newcomers to Advanced Micro Devices, Inc. (NASDAQ:AMD) are feeling the sting today, with AMD stock tumbling on heels of a concerning downgrade from Barclays.
In short, the research arm of the British bank doesn’t see — despite all the recent hype — that Advanced Micro Devices is actually gaining any market share.
Is Barclays right? Has AMD stock gained nearly 400% since the end of 2015 on nothing more than wishful thinking?
That may be an overly pessimistic way of putting it, in that Advanced Micro Devices is far better off today than it was a year ago.
On the other hand, Barclays makes a good point.
New and Improved
Advanced Micro Devices once was a powerhouse name that was fiercely competitive with Intel Corporation (NASDAQ:INTC) on the CPU (computer processor) front as well as hold its own against rival Nvidia Corporation (NASDAQ:NVDA) on the GPU (graphics processing) front. However, it slowly ceded ground in both markets as its hardware just didn’t remain as marketable as it needed to.
That has changed of late.
Largely driven by relatively new CEO Lisa Su, who took the helm in late 2014, AMD has been developing new products hoped to win back market share. Its Ryzen CPU was and still is a head-turning processor, and its new Vega GPU hardware is impressive to say the least. It was the company’s most recent GPU evolution, in fact, that delivered a bonus surprise: It’s ideally suited to help mine for cryptocurrency.
Cryptocurrencies like Bitcoin and Ethereum aren’t exactly new. But the business of “mining” them is a relatively new industry. It hasn’t been until the past few months that the right people realized that GPUs –which are capable of performing more simultaneous calculations than a CPU — are better equipped to look for the one-of-a-kind digital thread that makes up one unit of a cryptocurrency. Mining banks are now being established on a regular basis, with their organizers expected to compute their way to riches before anyone else unlocks those code “coins.”
AMD’s graphical processing units are the weapon of choice for many of those speculators.
More Lucky Timing Than Demand
The rise of digital currency mining and the launch of Ryzen and Vega have put AMD stock in a spotlight for the first time in a long time, to be sure. Barclays has a point, though: There’s still no conclusive evidence that Advanced Micro is winning back new market share on a permanent basis.
To be fair, Ryzen had a strong inaugural quarter in Q2, reportedly claiming 10.4% of the CPU market that has been long dominated by Intel. But take that success with a grain of salt.
Ryzen had been touted for months leading up to its launch, and the launch came at a time when Intel was between processors of its own. The latest iteration of its iX Core processors is seeing the last of its version make its way into OEM (and retail) hands, but its eighth-generation 14 nanometer CPU won’t be available until later this year.
Intel may well steal that market share right back.
And as far as tapping into the computing power of its GPUs for the purpose of mining cryptocurrencies or using that same advantage to develop artificial intelligence tools, Nvidia seems to be winning that war on the back of its new Volta architecture. In the meantime, with cryptocurrency prices crashing as quickly as they soared, demand for number-crunching GPU hardware could tumble just as quickly.
So in this light, no, Barclays’ downgrade of AMD stock to an “Underweight” and lowered price target of $9 — more than 30% less than the stock’s current value — isn’t unfair.
Bottom Line for AMD Stock
For the record, it’s not like this is something yours truly didn’t warn you about.
It was back on June 6, I explained:
“Now is not the time to tiptoe into AMD. That time was a year ago when the high risk was matched by the high reward. The reward isn’t so high now, but with Vega, Ryzen and now EPYC still in their infancy, there’s still a fair amount of risk. The 25% pullback from March’s highs suggests the market is finally starting to see this, but there’s an uncomfortable amount of downside potential still looming.”
That was the long way of saying the market put the cart before the horse, and a correction of the mistake was looming. Barclays is just pointing out the same idea, reminding us that Advanced Micro Devices has yet to actually prove it can turn its overhaul into an actual earnings turnaround.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
