The rally in AMD stock price has been driven largely by investor speculation and nothing more. Will 2017 be different? 

Shares of Sunnyvale, California-based, Advanced Micro Devices, Inc. (Nasdaq:AMD) have been on a tear for well over a year now. AMD stock price is up from $1.83 a year ago, to the current price of $13.3 (Feb 16 close price), a massive run by any measure. The stock has continued its strong rally into 2017, having already racked up gains of 17.3% in the year-to-date, outperforming the 8.1% rise in the Nasdaq Composite (INDEX:COMPX) and the 4.9% gains by the S&P 500 (INDEX:SPAL) over the same time period. While the stock is off to a strong start this year, the phenomenal run in the stock price has been fuelled more by speculative investors, with AMD having little to show as far as fundamentals go. However, 2017 could be a year of difference. Why? Let's see.

AMD Is Back To Growth, And It Is Likely To Stay This Way.

For starters, AMD is back on the track to growth. The company reported revenue of $4.27B for FY 2016, up 7% on a YoY basis, While that is not much of a number to brag about, it's certainly assuring to investors, given that the company had seen its top line shrink by 27.6% YoY in FY 2015. More importantly, with a clear focus on delivering a strong lineup of products targeted at the high-performance computing and graphics markets, the company can now realistically expect to claw back some critical market share from its bigger rivals, Intel in the computing space and Nvidia in the Graphics space.

Dr. Lisa Su, President and CEO of AMD, summed up AMD's  progress in FY 2016, on the recent Q4 2016 earnings call. The CEO wrote in the company's recent 8-K filing: "We met our strategic objectives in 2016, successfully executing our product roadmaps, regaining share in key markets, strengthening our financial foundation, and delivering annual revenue growth. As we enter 2017, we are well positioned and on-track to deliver our strongest set of high-performance computing and graphics products in more than a decade.”

With AMD set to attack the market with probably its strongest set of products in over a decade, the upcoming launches of the Ryzen CPUs and the Vega GPUs should help AMD maintain topline momentum in 2017. We had highlighted the opportunity ahead of AMD in a recent post and the current momentum should take the company closer to the goal of realizing this massive opportunity.

AMD Profit Margins Will Rise.

While we have highlighted the growth opportunity so far and the achievements in FY 2016, also noteworthy in the recent management commentary were some forward-looking statements. Onc again quoting the CEO from the recent conference call: "We entered 2017 with strong revenue growth and margin expansion opportunities as we prepare to launch our Zen-based CPUs and Vega GPUs that can return AMD to the high performance markets, where we have not materially participated in recent years."

Based on the management's commentary not only will AMD see strong growth in its top line, the company will likely see meaningful expansion in its profit margins. This has been a trend through the recent quarters, which have seen the company improve its profit margins at the gross, operating as well as net levels. As pointed out by a fellow Amigobulls writer in a recent post, AMD's Ryzen lineup, which is due to be launched on March 2, will be competing across price points and will offer better performance and efficiency in comparison to its competition. The higher price points should help AMD's ASP (average selling prices) if the product mix shifts towards the higher end. Given that AMD has historically competed in the lower-priced segments of the market, this launch should be a meaningful driver of profit margins.

Well, there is also another bit which should help AMD drive its profit margins higher. AMD had raised a funding round in 2H 2016. The company raised $600M in equity and $450M of debt. The proceeds from the round were channeled to retire higher interest debt. Based on the last analyst presentation from November 2016, the company reduced its principal debt from $2.3B to $1.8B and retired all but 200M of its short-term debt. The net impact will be a $55M reduction in annual interest expenses. The impact on the bottom line could be meaningful, given that the company reported a net loss of $497M in FY 2016.

Conclusion.

AMD stock has been on a bullish run for more than a year. However, the rally has been driven largely by investor speculation and nothing more. However, 2017 holds far more promise as AMD looks set for strong topline growth as well as higher profit margins. This should help the company drive meaningful EPS growth to support the huge run the stock has had in the recent past.