AMD Stock: More Upside for Advanced Micro Devices, Inc.?

AMD StockAMD Stock Jumped 13% on Friday

Advanced Micro Devices, Inc. (NASDAQ:AMD) is officially back from the dead. The company, which spent the last few years in the shadows, has finally regained its footing.

No wonder AMD stock is up a whopping 112.1% since the start of 2016.

The rapid growth of AMD’s share price is one of the best stories this year. The company has executed a brilliant turnaround, with both revenue and income on the rise. Much of the credit goes to AMD CEO Lisa Su, who’s been at the helm for nearly two years now. Her leadership led to a completely new direction for AMD stock. (Source: “How AMD CEO Lisa Su Tripled the Chip Maker’s Stock in 5 Months,” Fortune, July 22, 2016.)

Prior to Su, the company was in shambles. It had once been hot on Intel Corporation’s heels, but then a surge of new competition made AMD just another straggling player in the microchip industry. It was a measly $2.0-billion firm.

But I’m getting ahead of myself…

Let’s taker a closer look at last quarter’s results before digging into the bigger story.

Q2 Earnings for AMD Stock

AMD managed to cross $1.0 billion in revenue over the last three months, which represents sequential growth of 23.4%. The company also turned a profit for the first time in Su’s tenure, bringing in $69.0 million in net income, or $0.08 per share. (Source: “AMD Reports 2016 Second Quarter Results,” Advanced Micro Devices, Inc., July 21, 2016.)

This is the first quarter in more than two years when revenue increased rather than decreased. Although the company expected a return to profitability this year, management didn’t expect it to happen so quickly. In fact, the positive net income was a quarter early.

Most of the sales boom was caused by better-than-anticipated sales for special video game chips. The firm’s entire selection of graphics processors was flying off the shelves.

Other than that, AMD scored a ton of revenue from licensing out its microchip designs to a third party in China. This one-time revenue of $351 million from Nantong Fujitsu Microelectronics provided a major tailwind for AMD stock this year.

AMD Stock: The Bigger Picture

I’m excited to see the company leveraging new partnerships, but I do worry about the intellectual property aspect of the deal. Chinese firms are notoriously leaky when it comes to proprietary technology, so I wonder if we’ll see imitations crop up in the next few years.

If they do, AMD wouldn’t be able to match the low prices because it actually spends money investing in research—the copycats don’t. Those copying AMD would simply imitate whatever designs fall into their lap. Although there’s something to be said for owning an original AMD chip, some manufacturers can be tempted to cut corners, especially if the price is right.

Nonetheless, AMD is predicting that its business will continue to flourish as the video game market picks up. Part of that forecast is based on the adoption of virtual reality.

After all, let’s not forget that AMD powers Microsoft’s “Xbox” consoles and Xbox has a deal with Facebook’s Oculus. In order for the virtual reality (VR) technology to be fully realized, gamers will have to upgrade to a whole new system that Microsoft will release in 2017.

This strategy of Microsoft’s is called “Project Scorpio.” Every single one of Microsoft’s systems under Project Scorpio will have an AMD graphics chip at its core, which would mean continued growth for the company across the next 18 months. From an objective standpoint, that’s good news for AMD stock.

“In the second quarter we accomplished a significant milestone as we returned to non-GAAP operating profitability based on solid execution and strong demand for our semi-custom and graphics products,” said Su. “Based on the strength of our semi-custom products and demand for our latest Radeon RX GPUs and 7th Generation A-Series APUs, we are well positioned to drive growth and market share gains in the second half of the year.”

The Bottom Line on AMD Stock

Ultimately, this could mark a turning point for the microchip industry. In the last few years, companies have either been consolidating their market shares through acquisitions, or diversifying away from PC microchips. AMD went with the latter strategy and it’s starting to pay off for the company.

Despite its 112.1% gains since the start of the year, I still think AMD stock has room to the upside.