There’s Too Much Optimism Around Advanced Micro Devices, Inc. (AMD) Stock Now

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock had a great run in 2016, but the stock may not be able to repeat its performance in 2017.

Advanced Micro Devices, Inc. (NASDAQ:AMD) is announcing its fiscal fourth quarter earnings at the end of the month where investors will be tuning in with interest. Why? Well, this stock had an unbelievable 2016 where the stock price rose by nearly 300%, so you can bet that investors will be looking at the guidance to see if AMD can pull off a similar feat in 2017. Buying this stock at under $1.70 a share in late 2015 was a calculated risk.

There was millions worth of negative equity on the balance sheet and bankruptcy was being touted about as a real possibility. This resulted in sentiment being at record bearish levels at the time, but AMD eventually got its act together by shoring up its balance sheet through a series of deals and strong sales from its Polaris GPUs. However, astute investors know that a large portion of AMD’s share price gains last year came from announcements on what is coming down the track – particularly in the Ryzen CPU and Vega GPU areas.

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Ryzen CPU’s Will Find It Difficult to Compete With Intel Corporation (NASDAQ:INTC) Over A Four Year Period

AMD’s Ryzen CPUs are expected to go up against Intel’s core processors in the high end CPU market. Initial tests against Intel Corporation (NASDAQ:INTC)’s Core i7 6900K looked very promising last month. However, the window of opportunity here may be quite small. AMD’S Ryzen architecture is expected to remain in the market for the next four years which means it will be coming up against a host of Intel processors, since usually, new ones are launched every 15 months. Intel Corporation (NASDAQ:INTC), for example, is expected to launch a host of processors this year including the much anticipated Core i7-7700K. Whether Ryzen CPU’s can compete with these new processors over a period of more than 36 months remains to be seen.

The Vega 10 GPU Has Really Been Talked Up, But Will It Deliver?

The real hype though, is with the Vega 10 GPU which is expected to be able to take on NVIDIA Corporation (NASDAQ:NVDA)’s GTX 1080. Again initial tests have showed that the Vega 10 GPU is faster than Nvidia’s similar offerings (maybe even including the GTX 1080Ti.) in terms of frames per second. The real key here is how AMD has really changed the landscape with how it manages memory in its graphic processing units.

In fact, Vega 10’s HBM2 (high-bandwidth memory) vastly outperforms GDDR5 which is the memory used on NVIDIA Corporation (NASDAQ:NVDA)’s Pascal architecture. Does this mean AMD has a game changer on their hands here? Tough to say, but AMD seems to have produced a big leap here in its GPU architecture. I would caution investors about the hype being generated in this space at present. We only have to go back as far as last Summer to see how NVIDIA Corporation (NASDAQ:NVDA) gained more market share when both companies launched new GPU’s (1).

Due To The Huge Run Last Year, Investors Are Overly Bullish

Sentiment is illustrating to me that the market is pricing in meaningful gains in the GPU market, which in the end may not materialize. If we look at the sentiment chart, we can see that the stock reached bearish sentiment levels of 7 at the start of 2015 but now it has a reading of 35. In fact, sentiment reached the highest point in the company’s history last month which illustrates to me that investors are just too optimistic about Advanced Micro Devices, Inc. (NASDAQ:AMD)’s future growth potential. On the contrary, I look at the facts which state the company’s debt to equity ratio is still 4.23 despite coming down in recent times. Carrying this much debt on the balance sheet is risky especially considering the volatile nature of this industry. Any fundamental setback could derail the company’s growth prospects and adversely affect its cash position. No dividend, high debt and a history of negative earnings all elevate risk, especially after the huge bull run the stock had in 2016.

Summary

Although Advanced Micro Devices, Inc. (NASDAQ:AMD)’s growth prospects look encouraging, there is no way the stock can repeat its performance (2) in 2016. There are still major doubts whether its Ryzen CPU and Vega GPU areas can produce the growth that many investors are expecting. Its balance sheet also remains an issue. Big debt payments are on the horizon soon, so it will be interesting to see if the balance sheet can remain intact.

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The article There’s Too Much Optimism Around Advanced Micro Devices Inc (AMD) Stock Now originally appeared on amigobulls.com. Watch our analysis video on AMD

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Additional Links:

(1) http://www.forbes.com/sites/greatspeculations/2016/10/19/strong-polaris-gpu-sales-likely-drove-amds-top-line-higher-in-in-the-quarter/#70568c0935db?ref=il

(2) http://amigobulls.com/articles/will-2017-be-another-blockbuster-year-for-advanced-micro-devices-inc-amd-stock?ref=il&ref=im

(3) http://amigobulls.com/stocks-to-buy/top-tech-stocks/?ref=il&ref=im