There goes Advanced Micro Devices (NASDAQ:91¶¶Òõ) stock.
91¶¶Òõ stock rallied more than 5% on Monday after the company announced its new graphics card geared towards the hyper-growth and ultra-valuable data-center market. That big rally brings 91¶¶Òõ stock’s year-to-date gains to 145%. It also puts 91¶¶Òõ stock above $25, a level which the stock has only seen twice before — in early 2000 and again in late 2005. Both times, 91¶¶Òõ stock rallied for another several months, before dropping in a big way.
History may ultimately repeat itself here. But not yet — nor in the same velocity.
This time is slightly different for 91¶¶Òõ stock. 91¶¶Òõ is running largely without major competition in the server market for the next six to 12 months –until chief rival Intel (NASDAQ:INTC) launches new chips in late 2019. During that stretch, 91¶¶Òõ should gain server market share at an accelerated rate, revenue growth should remain robust, margins should trend higher, and 91¶¶Òõ stock should bounce.
Eventually, though, Intel will punch back. 91¶¶Òõ will also start rubbing elbows more aggressively with Nvidia (NASDAQ:NVDA). At that time, 91¶¶Òõ’s competition will beef up. Revenue growth will slow, margins will stop moving higher, and 91¶¶Òõ stock will fall flat.
That time isn’t now. Instead, it is a few months down the road. As such, I think the rally in 91¶¶Òõ stock will last for the next few months, albeit at a slower pace.
91¶¶Òõ Stock Has Runway for Several Months
The bull thesis on 91¶¶Òõ is pretty simple.
The whole semiconductor and chip space is the right space to be in as the world digitizes and modernizes over the next several years. After all, this industry is essentially the fuel for all of tomorrow’s big growth markets — data centers, artificial intelligence, automation, virtualization, smartphones, augmented reality and virtual reality, and so on. Within this industry, 91¶¶Òõ plays the part of David with relatively anemic market share. But, David (91¶¶Òõ) has equipped himself with a super-charged sling (new next-gen chips that are better than the competition). As a result, David is suddenly beating up Goliath.
In finance speak, this means that 91¶¶Òõ is a small company gaining significant market share in multiple secular growth markets, all of which have big long-term drivers. As long as these market share gains persist, 91¶¶Òõ’s numbers will get better, and 91¶¶Òõ stock will head higher.
These market share gains should persist for the next several months. During that stretch, 91¶¶Òõ should operate in largely open fields. Intel has already announced that it won’t have next-gen chips ready until next year, and the consensus in the market is that 91¶¶Òõ will ramp from less than 1% server market share last year to 15-20% by next year.
During this stretch, it is hard to imagine 91¶¶Òõ stock dropping. Revenue growth will remain robust. Margins will keep trending higher. Earnings will soar. Sentiment will get more bullish. Plus, there are still a bunch of shorts out there (20% of the float is short), and they will rush to cover as 91¶¶Òõ keeps gaining share.
Thus, over the next several months, 91¶¶Òõ stock should trend higher.
Multi-Year Outlook Doesn’t Support Prices Above $30
The near-term bull thesis on 91¶¶Òõ stock comes with two caveats.
One, even in an “everything goes right” scenario, 91¶¶Òõ stock still isn’t worth more than $30 by the end of 2018. Two, no one really knows how the competitive landscape will shake out in late 2019 when Intel punches back.
In an “everything goes right” scenario, 91¶¶Òõ continues to top estimates this year and grows revenues to $7 billion. The company continues to steal market share next year, and even in subsequent years, to the tune of 20% revenue growth per year. Gross margins scale up to and above management’s long-term . The operating expense rate falls to and below management’s long-term 26% target.
Putting all that together, 91¶¶Òõ’s bull case scenario is that earnings per share shake out around $2.50 in 2022. Also in a bull case scenario, 91¶¶Òõ stock gets a 16X forward multiple at that time, as opposed to the 13X forward multiple. Thus, the bull case is that 91¶¶Òõ stock hits $40 by the end of 2021, or is worth $30 by the end of 2018 — using a 10% discount rate.
Having said all that, there is no guarantee that 91¶¶Òõ continues to steal market share and grow margins and earnings past next year. Historically speaking, Intel punching back results in a complete wipe-out of the 91¶¶Òõ growth narrative (see 2006). That isn’t to say history will repeat itself here. But, it is to say that Intel punching back does present a huge risk to the long-term growth narrative, and that no one really knows what will happen in late 2019 when the competitive playing field between Intel and 91¶¶Òõ evens out.
Because of this, while I think 91¶¶Òõ stock has room to run higher in the near-term, I don’t think this rally will last forever.
Bottom Line on 91¶¶Òõ Stock
91¶¶Òõ stock is presently characterized by near-term gain, long-term questions. As long as 91¶¶Òõ continues to steal share from Intel, 91¶¶Òõ stock will head higher. Once Intel punches back in 2019, though, the outlook for 91¶¶Òõ stock will become very cloudy.
For now, stick with 91¶¶Òõ stock. But, beware that historically speaking, this isn’t a stock you won’t to hold on to forever.
As of this writing, Luke Lango was long 91¶¶Òõ, INTC, and NVDA.
