This article was written by David Berger, a Financial Analyst at I Know First and Finance student at the University of Michigan’s Ross School of Business.

AMD Stock Analysis: Cryptocurrency and New Products Can’t Stop the Inevitable

Summary:

ASIC Chips Hurt AMD Cryptocurrency Customer Segment

ROI Analysis

Lack of Innovation with Ryzen

Advanced Micro Devices Inc. (NASDAQ:AMD) ($12.64/share) is an American multinational semiconductor company located in Sunnyvale, California. AMD develops computer processors and related technologies for the business and consumer markets. Its main products include microprocessors, graphic processors for servers, and motherboard chipsets. Its main competitors include Nvidia and Intel in the microprocessing and Graphic Processing Unit (GPU) markets.

ASIC Chips Hurt AMD Cryptocurrency Customer Segment

As Cryptocurrency has continued increasing in value, AMD’s stock price has also seen a steady increase. Bitcoin, the most well-known cryptocurrency, has seen its price rise to $2,564.40 as of June 18. That is a 227.08% increase over the past year. AMD’s stock price has risen a similarly ludicrous 117.49% over the same timeframe. The fundamental link between cryptocurrency and AMD is Bitcoin mining.

A brief explanation of how Bitcoin mining works: Bitcoin is mined through solving complex math questions on the Bitcoin mining server. Miners receive Bitcoin for answering these questions and providing proof of work. Bitcoin miners quickly found out that graphic cards for gaming were much better at solving these questions than standard computing units. AMD makes these graphic gaming cards and sells many to Bitcoin mines. As Bitcoin gains popularity, AMD anticipates selling more chips. This was one of the reasons that AMD saw such a significant rise in stock price as the demand for Bitcoin jumped.

However, there are now faster ways to mine Bitcoin than using AMD chips. Bitcoin miners are switching to Application-Specific Integrated Circuit (ASIC) chips. These chips are more powerful at mining than an AMD chip, and also uses less energy. At the rate that miners need to solve problems to acquire Bitcoin, every few seconds matter. New Bitcoin mining technology improves often, as more companies enter the ASIC chip market. Until AMD creates chip explicitly designed for Bitcoin miners, AMD will lose out on revenue it has been receiving from this customer segment.

ROI Analysis:

A quick look at some financial metrics and technical analysis should also worry potential AMD investors. EBITDA/EV is a ratio that displays a company’s return on investment (ROI) that has been normalized to the industry. That gives this ratio more credibility than some others because it factors in opportunity costs.

(Source: Seeking Alpha)

The red line relates to AMD’s historical EBITDA/EV ratio, and the black line is the stock price at the given time. There appears to be a correlation between a jump in stock price and a higher EBITDA/EV ratio. But since the early 2000’s, the EBITDA/EV ratio has drastically declined, with a few short-lived peaks sprinkled into the chart. This shows that the company’s ROI has been rapidly declining over the past 15 years, which is never a good sign for a company.

New product announcements cause these short peaks. AMD excites investors with new chips and products, who in turn buy the stock because of the increased anticipation. In reality, however, the ROI is still a major indicator of a company’s success, and AMD is still underwhelming.

Lack of Innovation with Ryzen:

Ryzen is one of AMD’s newest products. It is a 4 core processor that competes with Intel’s dual core i3 processor. Additionally, AMD testing shows that Ryzen is a quieter processor than the i3. Ryzen has generated a lot of buzz, leading to a small surge in share price when it was announced. But in reality, the difference between a 4 core and a dual core is minimal. Moreover, most consumers do not factor in processor noise while debating which product to purchase since most processors are relatively silent.

AMD is consistently behind Intel when it comes to innovation. Ryzen may be a little stronger than Intel’s processor, but Intel is the company behind the main ideas. As mentioned previously, AMD gains support when announcing new products, as it did with Ryzen. Although cheaper, Ryzen uses relatively antiquated technology. Additionally, once consumers realize that it is not much different from Intel’s product, most will not seek out AMD’s Ryzen. Best case scenario for Ryzen is that it is a successful performer in AMD’s non-innovative product group.

This adds to the fact that AMD slipped another 2% lower in the discrete GPU (dGPU) market, from 22.5% to 20.5%, with Nvidia holding 77.5% and 79.5%, during that time. In the CPU market, Intel outperforms AMD 4:1. AMD also barely holds 20% in the video card market, with Nvidia at 57% and Intel at 21%. AMD is falling behind in with its products, and they are about to lose even more customers.

Given all of these points, I give a bearish prediction for AMD. This assessment is backed up by the negative algorithmic forecasts from I Know First. Over the next few months and the next year, AMD’s share price of $12.64 will fall. As seen with the relatively high predictability indicator, the algorithmic forecast predicts a strong chance of the stock dropping over these timeframes.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above in order to fill confident about/trust the signal.

Past I Know First Success With AMD

I Know First has been bullish on AMD shares in the past. In one such case, on August 14, 2016, the I Know First algorithm issued a bullish forecast for Advanced Micro Devices Inc. (NASDAQ: AMD). AMD had a signal of 88.82 and a predictability of 0.54.

As a result, in accordance with the forecast, the company’s stock increased by 87.82% within a year, showing a quick win by the algorithm.

This forecast for AMD was sent to current I Know First subscribers on August 16, 2016. To subscribe today click here.