The Next Big Thing for Advanced Micro Devices, Inc.?

AMD StockAMD Stock: This $5 Stock Is Going Vertical

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is one of the biggest winners in the tech sector this year.

In the past four months, it skyrocketed more than 150%. This week, though, AMD stock did not have a good start, falling as much as 3.04% on Monday. Is there any upside left in the chipmaker?

Yes. Allow me to explain…

No doubt, AMD has not done well for the most part of the last decade. In the central processing unit (CPU) industry, it lived in the shadow of Intel Corporation (NASDAQ:INTC). In the graphics processing unit (GPU) segment, it lost market share to NVIDIA Corp (NASDAQ:NVDA).

But now, there is one thing that could bring the company—along with AMD stock—back to the center stage. What is it? It’s virtual reality (VR).

VR headset makers have been getting a lot of attention, such as Facebook Inc (NASDAQ:FB), which is behind the “Oculus Rift,” or HTC, which makes the HTC “Vive.” But note that for those headsets to work, they need to be paired with VR-ready computers.

Recently, AMD unveiled a number of graphics chips capable of powering VR-ready computers. One of them is the “Polaris” architecture-based “Radeon RX” series of graphics cards, which start at just $199.00. (Source: “AMD Showcases New High-Performance Solutions at Computex Taipei 2016,” Advanced Micro Devices, Inc., May 31, 2016.)

Virtual reality is expected to be the next big thing in tech. Today, there are around 3.3 million VR headsets in the U.S. Forrester Research estimated that by 2020, that number will grow to 52 million. The prediction includes both high-end devices and mid-range devices, but not cardboard devices. (Source: “Virtual Reality will Reach 52 Million Units in the U.S. by 2020,” Forrester Research, May 31, 2016.)

Most VR headsets on the market today need VR-ready computers. But most consumers do not have VR-ready PCs and if they were to go out and buy one, they would most likely see machines priced at over $1,000.

That’s where AMD comes into play. Chips with similar performance stats to AMD’s Radeon RX series graphics cards often cost $399.00. By pricing its products at just $199.00, AMD offers a way to build affordable VR-ready computers. This could help expand AMD’s addressable market in VR.

The booming VR industry could be a huge catalyst for AMD stock. If we use Forrester Research’s number, an additional 48.7 million VR headsets will hit the market by 2020. If we assume that 80% of those headsets need to be paired with VR-ready computers, that’s nearly 39 million computers needed. If AMD manages to supply its chips to just a quarter of that market, it would generate billions of dollars in additional revenue.

In fact, one analyst believes that AMD might be able to regain its market share with the Polaris line of GPUs. Matthew Ramsay, analyst at Canaccord Genuity Group Inc, attended AMD’s Polaris launch in Taipei and is quite impressed by what he saw.

He said, “In fact, versus previous market share of near 40% that has declined dramatically to near 20% in recent quarters, we believe an improved Polaris hardware platform combined with aggressive pricing and improved tools support positions AMD to regain share toward 30%.” (Source: “Advanced Micro: Polaris, Zen Impress, Says Canaccord, Buy the Turnaround,” Barron’s, June 16, 2016.)

Ramsay also believes that customers want a second source in both CPUs and GPUs. Therefore, even with the presence of industry incumbents, AMD’s products would still find an audience: “Within these duopoly markets, we believe customers want AMD to survive and become a viable second source. With improved products, we believe this is on the brink of reality.” (Source: Ibid.)

The analyst recently upgraded his rating on AMD stock from a “Hold” to a “Buy,” and raised his price target from $3.25 to $6.00.

The Bottom Line on AMD Stock

Almost every major player in Silicon Valley is in the race to bring the next big VR device. When more consumers embrace these headsets, VR-ready computers are also expected to enjoy a huge surge in sales. As a company that makes a critical component of a VR-ready computer, AMD stock stands to win.