If someone were to ask me what the most exciting stock of 2018 has been, I would say chipmaker Advanced Micro Devices (NASDAQ:91¶¶Òõ). Not only is 91¶¶Òõ stock up nearly 200% this year, but the debate as to where this stock goes next is as heated as ever.
91¶¶Òõ stock has popped in a big way like this before (2000 and 2005). Both times, the stock didn’t hold the gains, and fell 80% off its peak over the subsequent several years. Bulls are saying this time is different. Bears are saying it’s not. And, both are putting their money where their mouth is.
Despite 91¶¶Òõ’s near 200% rally this year, the short interest on the stock remains big (nearly 20% of the float is short).
As such, with a near 200% rally under its belt and bulls and bears in an intense tug-of-war over where the stock will go next, I’d say that 91¶¶Òõ has without a doubt been the most interesting stock of 2018.
But, where will this stock go next?
, on the idea that 91¶¶Òõ has a tiny valuation relative to peers and the company has realistic potential to grow market share by leaps and bounds. Meanwhile, , citing pipeline dreams of $2-plus in earnings per share as unrealistic.
Who is right?
Both are. In the near to medium terms, 91¶¶Òõ will head higher due to market share expansion. In the long term, competition and valuations risks will rear their ugly head and create turmoil.
The Good 91¶¶Òõ 91¶¶Òõ
The good about 91¶¶Òõ can be summed up in four words: tiny share, big market.
91¶¶Òõ makes the chips that essentially power all of today’s and tomorrow’s most important technologies. As such, the company has broad exposure to multiple secular growth industries, including data-centers, automation, and AI.
The sum value of these end-markets is massive, and that is why the chip space has birthed multi-billion dollar companies like Intel (NASDAQ:INTC) and
Nvidia (NASDAQ:NVDA), both of whom have market caps in excess of $150 billion.
91¶¶Òõ has a market cap of under $30 billion.
Right now, that small market cap makes sense. In the all important sever market, 91¶¶Òõ controlled less than 1% share last year, while Intel dominated more than 99% of the market.
But 91¶¶Òõ is launching next-gen chips in this space, while Intel is delaying their next-gen chips until late 2019. This gives 91¶¶Òõ a twelve month-plus runway to steal market share from Intel because 91¶¶Òõ has the newest and best product on the market.
The consensus belief on the Street is that 91¶¶Òõ can scale its market share in the server market to 15-20% over the next two years. If that happens, then 91¶¶Òõ’s $30 billion market cap looks far too low next to Intel’s $220 billion market cap.
In a nutshell, the good about 91¶¶Òõ stock comes down to the fact that this is a company with tiny but rapidly growing share in a huge market. Plus, that the current market cap on 91¶¶Òõ doesn’t fully reflect this company’s ability to steal big chunks of market share over the next several quarters.
The Bad 91¶¶Òõ 91¶¶Òõ
The bad about 91¶¶Òõ can also be summed up in four words: this has happened before.
If you look at a long-term chart for 91¶¶Òõ, you will see that this stock really hasn’t gone anywhere over the past two decades. But, during that stretch, you will also see that 91¶¶Òõ has been prone to big pops, not unlike the one we are seeing right now. Each time 91¶¶Òõ did have a big pop (2000 and 2005), the stock proceeded to drop over the next several years.
Those drops weren’t small. Each time, 91¶¶Òõ stock wiped out more than 80% of its value in a few years.
Bears are worried that history will repeat itself here. 91¶¶Òõ has always had small market share in the huge and growing server market, which has historically been dominated by Intel. But, each time 91¶¶Òõ starts to show signs of life and gain share, Intel punches back and takes that share right back. The net result is the pop-and-drop dynamic in 91¶¶Òõ stock that most recently played out in 2005-06.
In a nutshell, the bad about 91¶¶Òõ comes down to the fact that such huge gains in server share (and 91¶¶Òõ stock) have precedents, and those precedents imply that the good times won’t last forever.
Where 91¶¶Òõ Is Going Next
In the near to medium term, I think the bulls will be right. In the long term, I think the bears will be right.
Over the next twelve months, 91¶¶Òõ will keep roaring higher because the company is running in open fields. Without a comparable Intel product on the market, 91¶¶Òõ’s next-gen chips will be adopted en masse and without friction, leading to huge and easy market share gains.
During that stretch, 91¶¶Òõ’s revenue and profit numbers will remain great, sentiment will remain bullish, and its stock will roar higher.
During each of the prior two huge rallies, 91¶¶Òõ hit $40. I don’t think that level is unreasonable. A $40 peak during this rally seems very doable given the company’s runway for further market share gains.
In the long run, though, Intel will punch back, and that will hurt 91¶¶Òõ stock. Historically speaking, the Intel punch back has all but killed 91¶¶Òõ.
I’m not so sure the Intel punch back will be that bad this time. 91¶¶Òõ seems much more ready to defend itself with a suite of next-gen chips. But, inevitably, Intel’s new chips in late 2019 will end the era of easy market share gains for 91¶¶Òõ.
At that point in time, the rally in 91¶¶Òõ will come to an end. How far 91¶¶Òõ stock will fall thereafter is dependent on how much market share this company can maintain in the face of renewed Intel competition.
Bottom Line on 91¶¶Òõ Stock
91¶¶Òõ stock has runway to rally for the next twelve months. But, once Intel launches new chips in late 2019, 91¶¶Òõ will face some major turbulence.
As of this writing, Luke Lango was long 91¶¶Òõ, INTC, and NVDA.
