Advanced Micro Devices Is a Very, Very Risky Stock

Despite several troubles, Advanced Micro Devices (AMD) has performed terrifically since the company released its earnings report. Stocks of beaten-down companies tend to shoot higher by a very great margin when those companies do better-than-expected.

The two reasons why beaten-down stocks rally on even the smallest of positive news are the greed of investors betting on its turnaround and high short interest that lead to bigger short squeezes. However, in most of the cases, the rallies don’t last and the stocks give up their gains in no time.

In the case of Advanced Micro Devices, I think investors have over-estimated the potential of its turnaround as the company is still in a lot of trouble.

A strategy full of risk

Advanced Micro Devices is on its way to introduce its new Polaris architecture and soon will launch graphics cards based on Polaris.
With the help of Polaris, Advanced Micro Devices expects to regain its position in the graphics cards market, as the company lost a substantial amount of market share to its foremost rival NVIDIA (NVDA). NVIDIA has been growing rapidly the past two years leaving Advanced Micro Devices with just 20 percent market share, a decline of 20 percent as compared to that in 2014.

While Advanced Micro Devices is about to launch its new architecture, NVIDIA has formerly taken the lead by publicizing two high-end graphics cards grounded on its new Pascal architecture. NVIDIA claims that the new graphics cards GTX 1080 and GTX 1070 will be more efficient and powerful than their preceding versions. Both Polaris and Pascal architecture-based graphics cards will be manufactured on progressive 14/16 nanometer FinFET manufacturing processes.

NVIDIA’s and Advanced Micro Devices’ strategy are completely different. NVIDIA is focusing on a high-end market by introducing high-end graphics cards first and the rest of the products (including mainstream) later, whereas Advanced Micro Devices' strategy is to release Polaris 10 and Polaris 11 and neither of them will aim the high-end graphics cards market.

Advanced Micro Devices’ Polaris 10 will pursue the mainstream desktop and the Polaris 11 will go after the mainstream notebook market. The company’s approach is a dicey gambit despite the fact that most of the volume in the graphics cards segment comes from the mainstream graphics cards. As NVIDIA’s mainstream Pascal graphics cards are still to be announced, it might be possible that Polaris could win back some significant market shares.

On the other side, the graphics cards segment is moving in the exact opposite direction, and the company jeopardises surrendering the profitable high-end graphics market to its rival NVIDIA for another product generation.

With the stock has been rallying over the last few weeks, I think Advanced Micro Devices is a very risky bet at current levels. The risk/reward profile is not favourable and I would advise investors shouldn't bet on it.
Published on May 23, 2016
By Prudent Investor

Copyrighted 2020. Content published with author's permission.

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