Activist Investors Need Not Apply
AMD's (AMD) lack of innovations in the past 3 months is impacting its stock. So far, AMD’s stock is up 10% in 2017, while Nvidia (NVDA) -its competitor- is up 55%. Nvidia's dedication towards the cryptocurrency mining market is the reason for Nvidia's rapid increase. So far, the cryptocurrency market is growing by a couple billion every month. Investors are planning to profit from this by pouring their money into microchip stocks like AMD and Nvidia, the supplier of mining chips for building cryptocurrency mining rigs.
Investors have speculated about a huge change in production in these microchip stocks; they got it with Nvidia, yet AMD hasn't followed up. This is a big reason that investors are dumping AMD's stock. AMD make a comeback? With just a $12 billion market cap, it certainly has the potential.
Still, we're betting that AMD can make a comeback? With just a $12 billion market cap, it might be getting overlooked.
Let's begin with the AMD’s Vega hype.
In late July 2017, AMD's advertisements for their new chip Vega led investors to an investing frenzy. The investors were hoping for competition towards the crypto mining chip market -in particular, Nvidia's 1080TI- instead they got an above average gaming chip. The point is, the Vega isn't a bad chip, actually, it's a well-above-average graphics card for gamers, yet it isn't what investors had in mind as competition towards Nvidia's 1080TI. The power consumption is higher than expected and the price is higher compared to other graphics card within the same range.
Investors weren't happy.
The underperformance of Vega caused the AMD stock to plummet by over 20% in early August. Some investors called Vega a watered-down above-average gaming graphics card with high power consumption rates. This is excluding the high price-point of $499; investors felt lied to about the original pricing. AMD's original marketing plan led investors to the belief that Vega was cheaper than Nvidia's 1080 TI. Overall what they got, was an expensive, above-average gaming CPU. Nonetheless, this could have created a buying opportunity, as AMD has been changing the conversation.
AMD's deception and lack of an innovative, low-power consuming, graphics card is a red-flag, at least for some investors. It showed that AMD is still marketing towards the high-end gaming market instead of being competitive in the cryptocurrency mining rig market. Also, there's the pricing. AMD was pushing the Vega as a cheap, groundbreaking, chip. Reviews on Vega versus Nvidia's lower-end 1080 TI shows that Vega is just slightly above it even though they're around the same price. In addition to the price hike, AMD is still currently treading very steeply, at 39x forward earnings, for some investors
Too much hype
The hype AMD created for the new graphics card pushed the stock higher by nearly 30% -- between late May 2017 and late June 2017. The price was at $10.89 a share in late May, then, surged up to $14.76 by late June. The stock has since dropped some 20% from early August. The Radeon RX Vega is a huge reason for this drop; investors lost hope for AMD's passion for innovation. Investors are worried AMD is showing bearish signs on the cryptocurrency mining market.
The Radeon RX Vega is a huge reason for this drop; investors lost hope for AMD's passion for innovation. Investors are worried AMD is showing bearish signs on the cryptocurrency mining market.
But there’s the server chip market - where AMD can carve out an unnoticed niche. That's where a possible activist could help force AMD to focus.
Again, all this Vega mess might have created a buying opportunity.
While AMD has been taking a lot of heat for not being competitive towards Nvidia or Intel (INTC) -- Intel is one of AMD's long-term competitors -- there is still an uncarved (and perhaps unnoticed) niche AMD is picking at. The Vega controversy has overshadowed the AMD's Epyc server chip, which is expected to gain market share from Intel.
AMD hasn’t had a strong run in the server market since 2006 when it was able to seize market share from Intel; investors are speculating a similar trend for the Epyc release, which will come around December-February 2018. The AMD x68 chip is cheaper, performs better, and is being adopted quicker than Intel's chips. Microsoft (MSFT) and Baidu will use the new AMD Epyc chips in data centers. HP (HP) and Dell will tag along much later.
Even though Vega was a flop, we foresee AMD stock moving higher as more investors realize the potential in its server chip -- granted AMD doesn't overpromise and under-deliver again. BUt it appears AMD is under-promising when it comes to its server chip potential.
There is still a lot of negative speculation in AMD, yet investors are hoping for a more bullish business plan on cryptocurrency mining graphics cards in the near future. We should see another announcement by AMD in late September on a new graphics card. Currently, AMD is relatively cheap, trading at a discount to Nivida. We could see a 20% increase -- back to $15 -- once the controversy of Vega finally settles down. As well, although AMD is a battleground stock, it could attract a smaller activist investor who's hoping to bet on the market's misconception of AMD. Granted, that's not a thesis worth buying around, as an activist likely won't be able to add much value at this stage -- granted an activist could ride the upside in the chip market -- akin to what David Einhorn's Greenlight Capital did with Micron Technology (MU).