Download now: How To Invest in the Coming Bitcoin Boom

Why AMD Stock Rose This Year

We Doubled our Money

Written by Briton Ryle
Posted August 28, 2018 at 8:00PM

I wrote about this stock right here in Wealth Daily on October 9, 2017, when it was around $13 a share. I wrote about it again on May 1, 2018. This time the stock was a little over $11. I added it to the Real Income Trader portfolio in April around $10. Today, that stock is at an 18-year high above $25 a share. 

I'm talking about Advanced Micro Devices (NASDAQ: AMD). And my thesis for buying it has been consistent: new management has finally gotten ahead of the semiconductor cycle. 

Cycles run fast in technology. That's especially true for chips. Processing speeds improve. Power consumption gets cut. Because the demands that companies and consumers put on chips is relentless. How many times do you hear someone complaining that a web page takes forever to load? 

When a chip company hits with a new chip, it gets featured in the best/fastest devices. Sales can stay strong for years. But when you miss, you get relegated to the bargain bin of devices, the Asus and Acers of the world. That's been AMD’s story for 15 years. The $700 laptop had Intel Inside, the $250 one had AMD. 

It takes a lot of R&D to design a new chip. Then you have to tool your foundry to make the new chip (or find a foundry that can do it). It's expensive and time consuming. And when a company misses, there's no quick fix. You have to look ahead a couple years and try to hit that cycle right. 

Sure, you get input from the device makers about what they think they will want. And you can copy the market leaders, too. None of that lowers the margin for error very much. Which is why it's been tough sledding for AMD for so long. 

But AMD has finally gotten ahead of at least one very important chip cycle: data center servers.

Big Data

I figured out the data center thing in January 2014. That's when I recommended a data center REIT to my Wealth Advisory subscribers. At the time, I still thought the whole "cloud" thing was a dumb marketing term, Amazon Web Services was going to break $10 billion in revenue for the first time (this year it will do around $25 billion), and Microsoft was still a month away from announcing a new CEO and committing to the cloud. 

But I was reading a couple white papers from Cisco about the coming boom in internet traffic, especially from mobile. Cisco wasn't even talking about terabytes anymore. It had moved on to exabytes (and I still don't know exactly what they are). The conclusion was inescapable. Data centers were gonna do very well. 

I picked through the five or six data center REITs that were public at the time and recommended the one I thought looked best. And it has been the best performer of the lot. Wealth Advisory subscribers bought in at $33, and the stock is currently at $115. The dividend has gone from $1.40 a year to $4.12. Sweet. 

For most of that time, Intel has absolutely dominated the data center server chip market. Its share of that market has stayed over 95% and may have been as high as 99%. Now, I can tell you, the server makers want competition for the chips they buy. It's Econ 101 that when there's only one supplier, you'll pay more. Even a marginal product can get a little bit in sales in an environment like that. 

There was rumbling that AMD was making a real go of it about a year ago. 

But it takes a truly competitive chip to get put into Cisco's data center servers. So in May of this year, when Cisco announced that it was launching a server line featuring AMD chips, that was the validation that AMD was hitting the big time.

I wrote on May 1:

Right now I am very intrigued with AMD’s CEO Lisa Su. She's been on the job about three years. She's redesigned chip architecture. The stock has come a long way, but there are signs that AMD is on the verge of being a true competitor to Intel in the data center and server chip space and to Nvidia in the graphic and AI chip space. There could be a lot of upside for this stock if it continues to take market share. 

What's Next for AMD?

So AMD is up 150% from those April lows. And in just the last four days, over 700 million shares have been traded. There are only ~925 million shares outstanding for AMD. I can tell you outright that funds have been buying AMD shares. They are believers. 

So what do you do with a stock that's up 150%, has a forward P/E of 40, and is showing signs of institutional buying? 

I can tell you that you're gonna hear the bears get kind of loud about how the current run has gone too far and the stock is due for pullback (or a "mean reversion," if you wanna sound really smart). And they are probably right, the stock probably will pull back. I wouldn't be shocked to see $20 sometime soon.

But I don't think this run is over. Because analysts haven't really changed their earnings estimates for AMD in three months. That's curious. I guess maybe we could conclude that the analysts don't see much earnings upside and that this run for AMD is the "dumb money." Personally, I think it's something else...

Investment banks are beholden to their clients. Especially their high-net worth clients. My guess is that the big boys are about to change their rating on AMD shares, and they are getting their clients in first. 

There's no need to run out and get AMD shares now. But put it on your radar. There's gonna be a good spot to buy it over the next six weeks or so. September is usually not the best month for stocks. At the same time, Wall Street's gonna want good stories to ignite a nice end-of-2018 rally. I bet AMD is one of those stories.

Until next time,

brit''s sig

Briton Ryle

follow basic@BritonRyle on Twitter

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

Comments

Buffett's Envy: 50% Annual Returns, Guaranteed