AMD Stock: Is Advanced Micro Devices, Inc. a $10 Stock in Disguise?

AMD StockThis Could Send AMD Stock Soaring

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock already provided huge returns to investors in recent months. But before you think that the opportunity is over, keep in mind that the company has just entered another multi-billion-dollar industry. If it succeeds, AMD stock’s current price will look dirt-cheap.

Let me explain…

I’m looking at the virtual reality (VR) industry. Sure, a lot of companies are vying for a position in VR. However, AMD’s strategy could be one of the smartest—it’s going to make VR more affordable.

If you have experienced VR before, maybe at the Consumer Electronics Show or through a demo at your local mall, you know how great the experience is; if you haven’t, you’re missing out. But as much as we may love VR, having the whole setup at home can be quite expensive: the headsets are nowhere near cheap and the computers needed to power the headsets are even more expensive.

Therefore, despite being an industry with great potential, VR’s appeal is limited by the current high entry prices.

That’s why AMD’s strategy could work great for the company. At a recent computer expo in Taipei, AMD showcased a number of graphics chips capable of powering VR-ready computers. The best part is that the company’s “Polaris” architecture-based Radeon “RX” series graphics cards start at a price tag as low as $199.00. Given that graphics processing units (GPUs) with a similar performance to the RX series typically cost twice as much, AMD’s price tag is a big surprise. (Source: “AMD Showcases New High-Performance Solutions at Computex Taipei 2016,” Advanced Micro Devices, Inc., May 31, 2016.)

Of course, as experience tells us, going after bargains is not always a good idea. Quite often, you get what you paid for.

Not at AMD, though. Even though the pricing is below that of its competitors, Radeon RX chips deliver on what they promise.

Devindra Hardawar at Engadget recently reviewed AMD’s “RX 480” graphics card. He wrote that the RX 480 “felt just as fluid as the GTX 1080 when playing Overwatch in 1440p with all graphics settings at their maximum.” (Source: “AMD’s Radeon RX 480 Is the New King of Budget Video Cards,” Engadget, June 29, 2016.)

To be fair, Hardawar was using an 8GB version of the AMD RX 480, which costs $239.00—$40.00 more than the 4GB base model. Still, NVIDIA Corporation’s (NASDAQ:NVDA) “GTX 1080”—the product he’s comparing the RX 480 to—costs more than $600.00.

What about VR? Well, Hardawar played several VR games, including EVE: Valkyrie, Farlands, and Lucky’s Tale. He said he “kept a particular eye out for stuttering or anything that could lead to motion sickness, but couldn’t detect any major issues.” (Source: Ibid.)

His verdict: “AMD wasn’t lying: This is a VR-ready card.” (Source: Ibid.)

So, AMD’s RX 480 delivers VR-ready performance and is quite affordable. Note that NVIDIA—AMD’s biggest competitor in the GPU business—is yet to release a budget-friendly VR product. Therefore, AMD currently has the budget VR market all to itself.

In the next couple of years, the virtual reality industry is expected to see enormous growth. Forrester Research predicts that by 2020, there will be 52 million VR headsets in the U.S., a large increase from today’s 3.3 million. (Source: “Virtual Reality will Reach 52 Million Units in the U.S. by 2020,” Forrester Research, May 31, 2016.)

But how can the industry reach that number if the price consumers have to pay to get into VR is as high as it is today? I believe the only way for VR unit sales to grow by the multi-millions is for the price to go down—and companies like AMD are going to help make that happen.

Let’s do some calculations here: We are 48.7 million VR headsets away from Forrester Research’s prediction of 52 million units. Let’s say 80% of those will need to be connected to computers; that’s almost 39 million computers needed. If AMD manages to put its chips in just a quarter of that market, it could generate $1.95 billion—and that’s just if it sells its base model.

The Bottom Line on AMD Stock

At the end of the day, don’t forget that AMD is already on its way to improving its financials. Chief Executive Officer Lisa Su recently said that she expects the company to return to operating profitability in the second half of 2016. (Source: “U.S. Chipmaker AMD Expects Return to Operating Profit in Second Half – CEO,” Reuters, June 1, 2016.)

With its budget-friendly strategy in the VR field, AMD could expand the total addressable market of VR products. It has the potential to generate enormous revenue growth in the next few years and that could mean double-digit—or even triple-digit—upside in AMD stock.