AMD Still Too High To Buy After Bounce On Xbox And PlayStation Wins

The big three in gaming consoles are Sony , Microsoft , and Nintendo .  Both Microsoft and Sony have announced new next generation consoles after a long hiatus. PS4 is the new console from Sony and Xbox One is the new console from Microsoft.

Advanced Micro Devices is the big winner.  Its processor designs are in the consoles of all of the big three.  Microsoft has highly customized AMD Jaguar design for Xbox One.  Another customized version of Jaguar is also the heart of Sony PS4.

Traditionally AMD has been in the business of providing X86 processors for PCs and servers.  AMD got into the graphic processor unit business when it acquired ATI.  Its Radeon brand of graphics processing units have always been popular among gamers.  In the consoles, AMD beat its rival, Nvidia .

Just like Intel , AMD missed the mobile revolution and fell far behind ARM architecture used in Apple iPhones, iPads and majority of Google Android based devices.  The big wins in the gaming console business have generated a strong does of momentum for AMD stock.  As is often the case, stocks tend to overshoot.  At present, AMD stock has overshot any stock price that can be justified based on fundamentals that matter, including the big wins in the console space.  In my analysis, the recent momentum in AMD stock is not justified based on upcoming product cycles and its competitive position.

My 30 years of experience  with technology stocks has taught me that the two primary determinants of stock performance over the long run are  the potential market share of  new products and their potential competitive positions.  Not only based on my experience but also based on extensive testing, my conclusion is that making decisions on technology stocks mostly based on traditional fundamental criteria such as P/E ratios seldom generate profits.

Part of the current run in AMD is due to a short squeeze.  Even after massive short covering, about 92 million shares of the stock are still short.  Considering that the float is 498.5 million shares, the short interest remains much higher than the historical norm.

Astute investors may consider buying AMD on a pull back to about $3.00. 

Follow me here, write me at Nigam@TheAroraReport.com or find me at The Arora Report.  Disclosure: Subscribers to The Arora Report have a long position in Apple.