Should You Buy Advanced Micro Devices, Inc. Stock After Yesterday's Pop?

Improving cash flows and declining risks will continue to drive AMD stock higher.

Shares of Advanced Micro Devices, Inc (Nasdaq:AMD) continued to defy gravity, gaining more than 6% in yesterday's trade. The stock hit an intra-day high of $14.1, just shy of its 52-week high. AMD stock is up 632% in the last one year. AMD stock gained on the reports that its Ryzen 7 1800X processors could ship as early as March 2nd. Though the company later said that the exact date of shipment was a mere speculation, the Sunnyvale, California-based chipmaker repeated that it will start shipping Ryzen 7 1800X chips in the "early March" timeframe. There is a lot of hype around the next set of products to be launched by AMD, Ryzen series CPUs and Vega GPUs.

Why so much hype around the Ryzen launch?

Ryzen is an attempt by AMD to recapture its lost CPU market share from Intel (Nasdaq:INTC). According to reports, Ryzen chips are likely to be a much better value proposition than its competitors. It will be much more powerful at a much cheaper price. Ryzen prices are likely to range from $129 to $499 covering all market segments. These price points are much cheaper than Intel's offerings in the corresponding segments.  According to reports, Ryzen 7 1700X 8 core CPU which will be priced at $499 "outperformed every other CPU in 5 out of the 8 tests. Including Intel’s fastest 8 core chip, the $1099 Broadwell-E i7 6900K". Such aggressive price and performance combinations will definitely be a strong attraction for customers. While some part of the Ryzen launch is already priced into the stock, AMD stock is likely to rally on the actual launch. Apart from Ryzen, AMD stock still has other catalysts such as Vega GPUs and improving fundamentals.

It's not all hype and speculation.

While hype and speculations have definitely contributed to the massive rally in the AMD stock, the main reason behind the run is the company's improving fundamentals. In 2015 AMD's financials were in a bad shape. AMD's revenues declined by almost 30% while its net losses shot up by almost $646 million. Shareholder value was -$412 million at the end of 2015. AMD had a huge debt burden with interest coverage ratio slipping into negative territory. The company was rapidly losing market share to its competitors and there were no new launches to look forward to. AMD stock had lost around 70% since the end of 2010 to September 2015. With all the gloom around, AMD stock was priced for bankruptcy. AMD stock was trading at a PS (ttm) of 0.3.

However, things have changed in the last one year or so. In 2016, AMD's revenue grew by more than 7% YoY (compared to 28% decline in 2015) while losses declined by 25%. AMD is expected to deliver 10% revenue growth in 2017 and further narrow down its losses. While AMD still has a huge debt burden, it has improved from the previous fiscal. The company's cash holding has improved from $785 million to $1.2 billion. Its operating cash flow is back to the black from red. While there are still significant risks embedded in the stock (AMD's beta is 2.47), the risk of bankruptcy has declined significantly. The decline in the risks has led to an expansion in AMD's valuation multiple. AMD's PS ratio (ttm) has improved from 0.4 a year back to 3.05, still much lower than NVIDIA's current PS ratio (ttm) of 8 and similar to Intel's PS ratio of 2.91.

Can AMD stock continue to go higher?

The two important factors which determine the stock price are cash flows and discount rate (cost of equity). In the last one year, AMD stock price has been mostly driven by declining discount rate (declining bankruptcy risks). From now on, it will be the improving cash flows which will drive AMD stock higher. The launch of new products like Ryzen CPUs and Vega GPUs will help AMD boost its revenues and profits. Vega could help AMD increase its market share in GPUs while the company can claw back its lost market share in CPUs from Intel. Of course, it will not be logical to expect AMD stock to deliver 2016 kind of returns, but the stock can still go up significantly. Barron's expects AMD stock to double by the year end. However, investors must remember that AMD stock is still a highly volatile (beta of 2.47) play and capable of wild swings in both directions. Having said that, the current risk-reward is in favor of AMD stock. AMD stock is still a good buy. The stock can rally through the Vega preview and launch of Ryzen processors.