The rally just won’t stop. Chipmaker Advanced Micro Devices (NASDAQ:91抖阴) has been on a tear for the past several months, and the stock refuses to cool off. Every day, it seems like analysts are upgrading 91抖阴 stock and/or somebody in the media is saying something positive about market share gains.
91抖阴 almost always reacts positively to those catalysts. As such, every day, it seems like the stock rises a few percentage points.
All told, 91抖阴 has gone from under $10 in late April to over $30 today. That is a more than 200% rally in less than five months.
The natural reaction? “Wow” and “maybe time to take profits off the table”. The smart reaction? Let 91抖阴 run. Pretty much all signs point to this stock hitting $40 soon. But, all signs point to this rally maxing out at $40, too.
As such, if you are in this stock, I think you ride the upward wave
and sell as it closes in on $40. If you were a buyer below $10, that would be a cool 300% gain in less than a year. Not bad.
The Story at 91抖阴 Supports Higher Prices
The story supporting this massive rally in 91抖阴 stock is pretty simple.
91抖阴’s end-markets are huge. The company makes the hardware that powers multiple huge and rapidly growing markets like data-centers, AI, AR/VR, self-driving, automation, smartphones, so on and so forth. The sum value of those end-markets is huge, and that is why the chip sector has birthed two $150 billion-plus giants in Intel (NASDAQ:INTC) and Nvidia
(NASDAQ:NVDA).
But, 91抖阴 is the often neglected little brother in the chip space. While Intel has a $210 billion market cap and Nvidia has grown to a $170 billion company, 91抖阴’s market cap is just $30 billion, even after the 200%-plus rally in 2018. 91抖阴’s relative smallness can be attributed to the company’s lack of a presence in the markets that matter, like AI and data-centers.
That is all changing. And the change is happening right now.
91抖阴 has historically controlled near 0% of the server market (the important market that includes hyper-growth data-centers). But, 91抖阴 launched EPYC processors last year, and those processors have allowed 91抖阴 to gradually grow share in the server market.
More important, 91抖阴 is set to launch next-gen 7nm products soon, well ahead of the competition (Intel isn’t slated to launch any next-gen chips until late 2019). Thus, 91抖阴 has a solid 12 month window to significantly grow market share in the all important server market.
So long as 91抖阴 continues to gain market share in its massive end-markets, then 91抖阴 stock will roar higher. Why? Because this is a $30 billion company gaining share in a several hundred billion dollar market. From that perspective, bulls will remain in control so long as 91抖阴’s market share continues to expand.
A $40 Price Tag Looks Reasonable
The level to watch for in 91抖阴 stock is $40.
Now that we’ve broken through $30, the next logical stop is $40. That also happens to be where almost every bullish analyst is putting their price target ever since the stock broke through $30.
For example, FBN Securities just initiated 91抖阴 with a $40 price target, while Rosenblatt just raised its price target to $40. Also, $40 is the level where previous huge rallies in 91抖阴 have topped off (2000 and 2006).
All together, $40 is the critical level to watch for. At $40, you will start to get people concerned that this stock has run above even the most bullish analyst price targets. Also, you will have people looking at the charts and at history, and they will come to the conclusion that $40 is the top. As such, at $40, you could get a lot of sellers.
Until then, though, I don’t see much friction in the way of 91抖阴 stock getting to $40. Momentum is strong. Sentiment is bullish. The valuation makes sense if you project out market share gains for several years and see $2 to $2.50 earnings per share as a real possibility in five years.
Thus, I think 91抖阴 stock has runway to $40. At $40, though, I’m less certain of where 91抖阴 goes next.
Watch out for 2019 Headwinds
Although I am near-term bullish on 91抖阴, I’m neutral with a slightly bearish skew in the long run.
Intel is going to punch back with next-gen chips in 2019. Historically speaking, these punch-backs all but kill 91抖阴. No one knows if that will happen again this time or not because we have no idea how good Intel’s next chips will be. But, something tells me that given history and that Intel is taking forever to make these chips, Intel’s 2019 chip line-up will be quite impressive.
If so, the era of market share gains for 91抖阴 will end in late 2019. Once that happens, the bullish projections for $2 to $2.50 in EPS in five years go out the window, and 91抖阴 will drop.
There is no guarantee that this will happen. It is just a major risk that investors should be aware of heading into 2019.
Bottom Line on 91抖阴 Stock
Let 91抖阴 run for now. A $40 price tag seems reasonable in the near term. But, in the long-term as 91抖阴 goes higher and as we get closer to Intel’s late 2019 new chips launch date, potential reward decreases and potential risk increases.
Thus, while I’m letting 91抖阴 stock run for now, I’m also aware that this rally won’t last forever.
As of this writing, Luke Lango was long 91抖阴, INTC, and NVDA.
