AMD: Breathe In Your Fears

A shift in sentiment is occurring in AMD (AMD). Look and listen and you will see and hear various news organizations/authors starting to beat the fear drum that AMD has gotten ahead of itself and is overvalued. Maybe that’s true or maybe it is not. However, it’s reminiscent of the scene in “Batman Begins” where Ras’ al Ghul says “breathe in your fear” because that’s what successful investors/traders have to do. You have to acknowledge problems at a company, a.k.a. fears, and learn how to trade around it. We could also say “breathe in your hype” as analysts, for the most part, are upgrading AMD to sky-high levels without due diligence.

We also have daily “upgrading” to play catch up – with a few analysts posting lower price targets than the current share price – a.k.a. stealth downgrades.

Thus, we are looking at an upcoming earnings cycle of extremes.

Here’s our view and how we might play Q3 earnings for AMD given the fear and hype.

AMD Fear, AMD, Nvidia, Intel, Polaris, Vega, AMD Vega, AMD Polaris, AMD discount, Q3, AMD Q3, GPU

Overheated?

The question is this – Is AMD overheated? Maybe… it feels like a mixed bag when one looks at CPU/server sales and then the bearish GPU outlook. Sure, the long-term story is great (and I’m long term very bullish). But in the short term… let’s review the concerns.

Immediate Concern

Nvidia’s (NVDA) new GPU series reviews are in and it’s a mixed bag. On one hand, you have some interesting technology upgrades, i.e., hybrid ray tracing and new anti-aliasing methods for ultra high-end GPUs. On the other hand, you have very high prices (given the less-than-enthusiastic performance gains). If prices were lower, the masses would be a bit happier. Nevertheless, the real meat will be how Nvidia prices mid-range mass cards such as the 2050 and 2060. Those are the cards that will compete against the aging AMD Polaris GPU line (the 400-500 series).

The Great Mining Flood of 2018

Crypto miners are currently flooding the second-hand GPU market. One friend of mine recently sold his entire crypto operation of 70x Nvidia 1080 Ti cards on eBay to replace it with ASIC processors. Multiply that times millions of miners. The market is being flooded with GPUs. Expect to see more rebates and price cuts on the GPU side of the house.

Nvidia can (hopefully) swing users to the new 2000 series once the low-to-mid range cards arrive. At the moment, AMD has no new GPUs to push consumers to… though rumors point to a Polaris 3.0 refresh.

Breathe It In – That’s (AIB) Sales Fear

Our good friend, Akram’s Razor, covers the GPU demand in his article “Winter Is Here.” He goes into detail covering the lack of demand seen by the Asian add-in board GPU companies. It’s well worth the read. Here’s a small taste of GPU goodness from his article (copied with permission from the author).

The early evidence of the pressure on this business can be seen in dedicated AMD AIB TUL Corp.’s monthly revenue data.

AMD implosion, AMD, Polaris, Vega, GPU drop, GPU implosion, Q2 AMD, Q3 AMD, Q3 drop AMD

TUL is a small distributor, but there’s no getting around the hit here. Which should have AMD investors now asking themselves exactly what the GPU drag is going to be going forward. If AMD can hit their year-end goal of 5% share in datacenter, I still don’t think that will offset the 40% decline the GPU biz is facing from its Q1 peak. So, anyone looking for numbers to get excited about as far as reported results go will need to wait until Q1 2019 guidance to really see what weight CPU can carry in the face of a far softer GPU biz. Current consensus is calling for AMD to grow revenue 7.5% in 2019. If you consider GPU H2 vs. H1 2018 and the carry-over in that biz, this growth has to come with the GPU biz still shrinking over 2018. And if console is expected to be softer that’s another headwind.” – Source Akram’s Razor

Looking at the numbers he compiled, we can see a massive drop in GPU demand starting in July of -71.79%, followed by August at -68.44%.

fear, gpu, amd, q3 results, Polaris, Polaris 3.0, Polaris refresh, Vega, Navi

Rebates/Price cuts

Speaking of weak sales – just last week, the cheapest we could buy an AMD 580 8GB card was around $225 after rebates. This week you can get a brand new AMD 580 8GB MSI for $189.99 after rebate AND it comes with $150 of free PC games. Did we mention it ships free?

AMD 580, AMD, Radeon, AMD price cuts

AMD Sale, AMD rebate, AMD Newegg, Newegg sale

Let’s see the prices on Camelcamelcamel which tracks Amazon sales. Note, you can find prices higher or lower than the ones we are showing. We stuck with the 8GB AMD 580s as that is a good mid-range card consumers flocked to during the mining craze. Notice, the red used line is drifting down fast.
AMD, AMD price drops, Camel, Camelcamelcamel, AMD price cuts, Polaris, Vega

CPU Shortage

The bright note countering the mixed GPU outlook is Intel’s (NASDAQ:INTC) CPU shortage. Obviously, AMD can sell into the demand Intel is experiencing. Recent Nvidia reviews detail that the 2080/2080 TI are CPU bound. This bodes well for both Intel and AMD. If consumers are willing to fork out premium dollar for these high-end cards, then they should be pairing them with the high-margin solutions from both companies.

Expounding upon the CPU shortage, Micron (MU) CFO revealed in the Micron conference call on 9/20/18:

I don’t know exactly how long the CPU shortage will last. I think on the inventory correction side, it will be a couple of quarters before inventory gets reduced.”

Sanjay Mehrotra (Micron CEO) offered “I would just add that the CPU shortages, we expect it to be short term; it’s possible that it goes beyond Q1 as well.”

Obviously, AMD can benefit from Intel not being able to meet demand.

AMD Response

The Nvidia RTX price-to-performance is wanting, but by Nvidia at least getting the cards out the door (and the tech to developers), it’s a positive event for Nvidia. The huge die sizes of Nvidia cards mean that if AMD can move Navi’s release date forward and get it out pre-summer – AMD could bring some heat to Nvidia’s line of products. Navi is rumored to be a smaller part with high performance. If Navi does, in fact, have a smaller die size and bring good price to performance numbers… AMD could have a hit on their hands. Then again, that’s a lot of “coulds” and “if” statements for a product that is not even out to compete and not scheduled to arrive for quite some time. Furthermore, Nvidia will not be resting idle… expect a 7nm shrink on Turing with time using the same process AMD is using at TSMC (TSM).

Updated Polaris 3.0

Currently, updated rumors of a Polaris 3.0 refresh have surfaced, pointing toward a 10-15% speed bump. While not exactly exciting (Polaris architecture was introduced in 2016), the 500 series does offer good price-to-performance for the dollar. A refresh would help bulk up AMD’s GPU division and perhaps buy them much needed time (while giving gamers something new to covet). This would, in effect, redirect demand from “used” cards to AMD’s “new” cards.

How We Are Playing Fear/Hype

At this point, we are day and swing trading the January $29 and $30 puts. The daily follow-the-leader “upgrades” create nice entry points; the subsequent daily slumps in price in the evening offer nice exit points. As the old saying goes… “It works till it doesn’t.” As of now, it’s working but eventually, things change and we will adjust fire accordingly. We are keeping the positions rather small though as to avoid trouble if AMD blasts off to infinity and beyond. However, we are having a blast playing the ebb and flow of daily pops and drops.

As we approach earnings, we will explore putting a straddle in place to catch extreme movements when/if it makes sense.

Given the murky waters concerning earnings outlook (optimistic server and CPU expectations – very negative GPU outlook), we might see extreme movements that we are able to profit from. After Q3 earnings, we expect much-needed light to be shed on the stock. From this, we can adjust fire.

Disclaimer

Options can be dangerous: Tread with caution. Investors should not read this and mimic it, as the information will be out of date and stale. Investors or traders should view this simply as an idea and then adjust it to meet needs. If you need more help, please consult your broker. AMD at the current price and baked in expectations is obviously dangerous. Play safe. Have fun.

Disclosure: I am/we are short AMD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We own $29 and $30 Jan 2019 puts. We may use a straddle as earnings approaches to capture extreme movement up or down.
We are long NVDA.
We wrote this using an Intel CPU and AMD GPU.

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