This Could Be Huge for AMD Stock
In the past several months, I have been arguing that Advanced Micro Devices, Inc. (NASDAQ: AMD) stock could finally see a turnaround. As it turns out, AMD stock indeed climbed out of the doldrums. In the past three months, its shares surged an astonishing 90.5%.
Now, I believe there is one catalyst that could send AMD stock even higher.
Let me explain…
If you have been following chipmakers in the past several years, you’d know that for the most part, AMD stock wasn’t really a hot commodity. In the central processing unit (CPU) business, it lived in the shadow of the mighty Intel Corporation (NASDAQ:INTC). In the graphics processing unit (GPU) segment, AMD lost market share to NVIDIA Corporation (NASDAQ:NVDA).
That kind of performance was deemed unacceptable by the market. As a result, AMD stock plunged. Even after the recent climb, AMD shares are still down more than 55% in the past five years. Ouch!
But what if the company can claw back some market share?
At first, this doesn’t seem to be that possible. Both Intel and Nvidia have been doing an amazing job, and consumers love their products. Will they give up their CPU and GPU market shares that easily?
No, but AMD is not really trying to fight over the existing market. Its strategy is to expand the addressable market and pocket all the gains from that.
That sounds very ambitious. But the company does have a solid plan in place.
I’m talking about the virtual reality (VR) industry, which every chipmaker is aiming at right now. For AMD, the plan is to price in a way to make consumers who otherwise wouldn’t get into VR to purchase AMD-powered systems.
The key to that plan is AMD’s next-generation “Polaris” graphics card. The Polaris GPU architecture is based on a 14-nanometer (nm) manufacturing process optimized for DirectX 12 and virtual reality. It will be ideal for gaming with VR headsets. The best part is that the Polaris might give AMD an opportunity to enter an untapped market.
According to Roy Taylor, who is the corporate vice president of alliances, content, and VR at AMD, the Polaris line of GPUs would be tailored for mainstream users, especially those who want to create a VR-ready system.
“The reason Polaris is a big deal, is because I believe we will be able to grow that TAM [total addressable market] significantly,” said Taylor. “I don’t think Nvidia is going to do anything to increase the TAM, because according to everything we’ve seen around Pascal, it’s a high-end part. I don’t know what the price is gonna be, but let’s say it’s as low as £500/$600 and as high as £800/$1000. That price range is not going to expand the TAM for VR. We’re going on the record right now to say Polaris will expand the TAM. Full stop.” (Source: “AMD’s Polaris will be a mainstream GPU, not high-end,” Ars Technica, April 27, 2016.)
Basically, AMD and its archrival Nvidia will be addressing different segments of the market. While Nvidia’s “Pascal” will appeal to the higher end of the market, AMD is focusing on mainstream users.
Virtual reality is expected to be huge, with the potential of bringing in billions of dollars in both software and hardware revenue. If Polaris can be used to power affordable, VR-ready systems, it could be a huge catalyst for AMD stock.s
The Bottom Line on AMD Stock
Don’t forget that even without the VR segment, AMD is already on track to take back its market share. In the first quarter of 2016, AMD’s overall share in the discrete graphics card market increased by 3.2 percentage points to 29.4%. The main driver behind that achievement was the popularity of AMD-equipped notebooks. In the quarter, AMD’s share in the mobile GPU market increased by an impressive 7.3 percentage points to 38.7%. (Source: “AMD Takes More GPU Market Share From Nvidia in Q1 2016-Builds Momentum Ahead of Polaris Launch,” WCCF Tech, May 19, 2016.)
Simply put, AMD is firing on all cylinders. For AMD stock investors, the best could be yet to come.