Question Time - Is AMD (NASDAQ: AMD) Stock Overvalued?

AMD'south performance this year has been stunning...

This is not investment advice. The writer has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ideals policy.

AMD (NASDAQ:AMD) has been on a remarkable run. With a 52 week trading range as low as $one.65 and a high last week of $viii, it'southward currently sitting pretty at $7.46. Merely what has been the driver of this remarkable creation of shareholder value? Well, that's where things get a bit more complicated.

Broader Manufacture Trend?

It's true, tech (and chip makers in item) have driven a lot of growth in the market in recent times, being one of the best performing sectors in the South&P 500 for the terminal year, but let'southward exist realistic, although the tech sector is doing well, AMD is not riding the broader wave of the tech industry resurgence.

Information technology'southward certainly a factor which people may be because in choosing their investments, but although AMD stock is up a lot, information technology'due south not been the smoothest of rides to get to where it is today, let'south have a look at what'south going on.

AMD (NASDAQ:AMD) – Is the turnaround here? Perchance.

We know that AMD has been working to get itself onto a turnaround trajectory. The visitor has spent years in the doldrums from a financial perspective which has been reflected past its poor earnings quality, relatively low valuation and in some respects by the operation of the products information technology makes.

Console blueprint wins and in one case off payments are all well and skilful, but nosotros know what generally drives chip makers profits, namely performant products in the channel for retail and organisation builders/data centres seeing you lot as a feasible alternative and placing orders.

AMD (NASDAQ:AMD) hasn't been peculiarly competitive in the CPU space for quite some time. Similarly, although they have somewhat managed to go on pace with Nvidia in the GPU space, they always seem to be a trailing competitor.

Some of you lot may think the piece I did previously discussing monopolies and monopolistic situations (here). I saw it debated both here and on Reddit among other places, lots of quotes were taken and used out of context. Of course monopolies in general are considered "bad" for the consumer, merely the point of that article was non that AMD should be supported at all costs, more and then that for AMD to be doing its chore, it actually needs to compete effectively with both Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) and turn itself effectually, giving its clients (whether retail or b2b) an incentive to buy from it again.

Well as things stand, the turnaround SEEMS to exist in progress, only has information technology fully taken hold yet? That's harder to call. Certainly the stock price would seem to bespeak it is, but the question is does the stock price accurately reflect the value of the company? This seems not to be the case from a fundamentals perspective.

GPUs are an important product. Nvidia (NASDAQ:NVDA) has shown just how successful a business tin can exist made from this 1 sector alone impressively. AMD has been lagging in market share for GPUs for a long time only with the launch of Polaris, AMD finally seems to be regaining market share, as indicated in the latest Jon Peddie report (source) showing AMD'due south market share jumping to 29.9% from 22.8% last quarter and 18% a yr ago. Sure, that'south a decent proceeds, but probably not enough by itself to justify the stock cost surge this twelvemonth. Also keep in listen that although its market share is on the up, AMD'due south earnings terminal quarter (here), while decent, shows that in that location is still a long manner to get for AMD (NASDAQ:AMD) to be considered a solid company financially. Additionally, it still isn't fully competitive in the GPU infinite with Nvidia given that information technology is currently absent from the height finish and effectively has nix to compete with the 1070 and above yet, although the expectation is that Vega volition obviously endeavour to rectify that situation when it launches soon.

So we come to the other cornerstone of AMD'due south turnaround strategy: Zen CPUs.

As I'm certain I don't need to tell anyone on this site. Zen isn't here yet . We are starting to see sniffs and hints and clues every bit to its performance (Ashes results here, AMD controlled examination here), what's been seen and said looks anything from reasonable to impressive, just there'southward but not a huge amount of data yet on which to pass judgement.

Ultimately a lot of these sniffs are what is feeding AMD. The underlying fundamentals of the company don't seem to justify its current valuation equally things stand up today.

Momentum is a big driver...

AMD – An Practice in Sentiment and Momentum

What does this mean? Certainly data such equally what is bachelor on Zen so far shouldn't exist ignored, sensible investors do well to admit all relevant and fabric info, whether information technology supports their original strategy or non.

AMD'due south (NASDAQ:AMD) rise to prominence has been a jumpy one and not for the faint of center. Price jumps spike relatively quickly and sharply on the back of a lot of talk, similarly some adequately sizeable drops take also occurred, likely due to profit taking, but the overwhelming tendency is an upward 1.

Leaked benchmarks and visitor statements are gathering stride and the market place is certainly pricing in a success with Zen, Vega and Polaris (already released but didn't really striking earnings last quarter as it was only available for a curt period of the quarter), expecting that AMD's new products will both perform and sell very well.

Also go on in mind that AMD was a heavily shorted stock. At the peak (last Nov), short interest in AMD would take taken 19 days to cover, whereas we're now down to 3 days.

That is by virtue of both the fact that SI in AMD has reduced from 14.8% to 9.1%, likewise equally trading volume in AMD jumping significantly, with an average daily volume in AMD shares beingness 26.8m for the concluding 100 days, thirty.3m in the terminal ninety and a staggering 39.5m in the last 5 days. Go on in mind, as shorts cover their positions, this volition also contribute to the increase in toll.

And so ultimately what we have is a very jumpy stock which is trading in all likelihood quite heavily on the footing of sentiment and momentum with expected future render and very trivial to do with the actual value of the visitor as it stands now.

Wise Man Saying: Y'all can exist right all day long, if the market thinks you're wrong, get the *$£%& out of the way

The higher up maxim is something of a joke, but also holds some truth. Positions which ride reverse to the marketplace simply make coin once the market at big realises y'all were correct all forth and maybe they were wrong. We're conspicuously not yet in that territory and are unlikely to exist until probably H1 next yr sometime realistically depending on what comes out regarding Zen and Vega in the meantime. What we've seen of Zen isn't much at this stage. Polaris is doing reasonably on the minor amounts of data we have but Vega is still an unknown quantity.

Realistically, whether you think AMD is overvalued or not volition come down to how well you retrieve Zen, Polaris and Vega will perform, with Zen likely being the largest contributing factor. IF Zen does extremely well, AMD will likely justify its electric current lofty valuation in the medium term, and potentially more in time. The market place has lapped up the news of Zen thus far, despite the small filibuster which now seems evident given that previously Lisa Su stated we would likely meet some Zen chips hit the shelves in Q4 this year, although that has now been pushed back to Q1 which was when the majority of SKUs were expected to hit anyway.

Ane also needs to proceed in mind that fifty-fifty if AMD does a better chore of competing competently from a technical perspective, it is probable that Intel and Nvidia accept room to manoeuvre with their current pricing structures and tin can also pull the rug out from under AMD by reducing prices to make their products more competitive from a value standpoint. Remember likewise that the sales wheel into the enterprise space is typically a much longer 1 than it is for the retail marketplace where a user just wants a PC. That much existence said though, the enterprise is very conscious of supplier risk and typically takes diverse suppliers where possible to safeguard itself (particularly in mission critical tasks) confronting "putting all its eggs in one handbasket" so to speak. Every bit such, it's likely that AMD may make some small inroads into the enterprise if it is genuinely competitive, but certainly the majority of the marketplace will be a medium to longer term try to secure. 1 which AMD volition demand to sell significantly into to be successful.

Volatility? Why yes sir, load me up delight!

Certainly on the strength of the current data, AMD looks overvalued at nowadays, but obviously there is significantly cloth information coming in the next few quarters which the market has priced in overwhelmingly positively. That much said, unsaid volatility on AMD options is high compared to its two nigh relevant competitors with about a 40% spread to Intel on one month and a 45% spread to Intel on 8 calendar month at the money options (by which time we should have a good pic of how the turnaround has gone).

The story vs Nvidia is a similar ane with a spread of 26% on front calendar month and 29% on 8 month at the coin options.

Bodily implied volatility on AMD at the money options sits at a staggering 55.nine% for 1 month and 67.viii% for eight calendar month as things stand up. That'south a lot of doubt priced into the market place so the cost of shorting either traditionally or synthetically is not going to be small for anyone who wants to take that route.

AMD is definitely well into its turnaround program, the marketplace seems to retrieve it volition be effective, keep in heed however that although Zen may be a corking success, the tide of progress marches ever on. Keller is no longer at AMD and a successor to Zen will exist required one day. Exercise they take plenty other in house expertise to keep the wolf from the door in the long term? Time will tell, only certainly in the short to medium term, it seems like AMD may be onto a good matter.