AMD Stock: This Is Why the Bears Are Wrong on Advanced Micro Devices, Inc.

Further Gains Ahead in AMD StockFurther Gains Ahead in AMD Stock?

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is having a pullback. But if you think there is something wrong with its fundamentals and turn bearish too, you’d be missing a huge opportunity.

Let me explain…

AMD stock slipped quite a bit lately. On Wednesday, it fell 3.1%. On Thursday, it fell another 4.3%. Why? The company just announced the pricing of its new graphics chips.

At a computer expo in Taipei, AMD announced that its new line of graphics cards—capable of powering computers equipped for virtual reality (VR) software—would start at $199.00. (Source: “AMD Showcases New High-Performance Solutions at Computex Taipei 2016,” Advanced Micro Devices, Inc., May 31, 2016.)

The reason why this spooked the market is that at $199.00, AMD’s pricing is much lower than comparable products, which often go for around $399.00. (Source: “AMD Prices 3-D Tech to Spur Virtual Reality Market,” The Wall Street Journal, May 31, 2016.)

AMD stock bears believe that with lower pricing, the company would see lower margins and make a lot less money than its competitors.

But I don’t think that’s going to be the case. In fact, the pricing is exactly in line with its strategy to expand the addressable market.

You see, for many consumers, virtual reality is not exactly cheap to get into. While almost everyone who has tried VR headsets is wowed by the experience, not everyone can afford a headset and a VR-ready computer. A survey conducted by the Advanced Imaging Society in April suggested that 68% of respondents found VR equipment to be too expensive. (Source: Ibid.)

To give you an idea of how expensive it is to enjoy virtual reality, here are some numbers. The “Oculus Rift” headset starts at $599.00, while an HTC “Vive” would run you $799.00. And that’s just the start. To use those VR headsets, you’ll also need a PC that has a graphics card powerful enough to run VR software. Those PCs typically start at $799.00 and can go well above $1,000.

And note that most of the existing PCs are simply not VR-ready.

“Less than one percent of PC users have systems that are capable of doing VR,” said Raja Koduri, senior vice president and chief architect of AMD’s Radeon Technologies Group. “The entry point is very, very high.” (Source: Ibid.)

With AMD’s new lineup of chips, though, VR-ready PCs could have a more mass market-friendly starting price. The company said that its new “Radeon RX” cards deliver performance equivalent to VR-ready graphics cards that typically cost $500.00.

Koduri also said that computer retailers prefer to stock PCs that cost less than $999.00.

Note that AMD’s pricing strategy is not used just in VR-oriented chips, but in its other products as well.

For instance, the company introduced its new high-performance processor, the “AMD A10-7890K,” in March. It is the company’s fastest chip with integrated graphics. The A10-7890K processor has four CPU cores and “Radeon R7” GPU cores. It’s based on the Godavari architecture and has a horsepower of 1.02 teraflops. (Source: “AMD’s New A10-7890K Is Its Fastest-Ever Desktop Chip with an Integrated GPU,” PC World, March 1, 2016.)

But for AMD stock investors, what’s really special about the chip is that despite its impressive performance, it won’t break the bank for gamers. The A10-7890K processor retails for $165.00, so it’s possible for consumers to build gaming desktops for less than $500.00. That could expand the addressable market of gaming computers.

The Bottom Line on AMD Stock

Keep in mind that AMD’s newly announced VR-ready graphics cards are set to formally launch on June 29, so it will likely be a few more months before we see how the strategy works out.

The company has high hopes about its future performance. AMD’s chief executive officer, Lisa Su, said on Wednesday that she expects the company to return operating profitability in the second half of this year. (Source: “U.S. Chipmaker AMD Expects Return to Operating Profit in H2 – CEO,” Reuters, June 1, 2016.)

Where will AMD stock go next? Only time will tell, but don’t forget that the up trend is still going strong. Despite the recent decline, AMD stock is still up 68.7% in the past three months.