Thursday, 2 November 2017

If AMD Was Canadian, It Would Be A $20 Stock Right Now


Summary

AMD had a strong Q3, greatly aided by the impact of GPU demand thanks to cryptocurrency mining.
The bearish argument against AMD, led by Morgan Stanley, includes the assumption that demand for the GPUs for crypto mining will fade.
In Canada, the deal flow has been incredible for blockchain and cryptocurrency stocks. Canadians can't get enough of anything to do with this industry right now.
September headlines that include robust hiring in the industry and Fidelity experimenting with mining suggests that this market is nowhere near topping out.
I believe that the assumption that crypto mining will fade is wrong and AMD will beat expectations for this sector of its business.

 
If Advanced Micro Devices, Inc. (AMD) was a Canadian company, it would be a $20 stock right now. And I'm not talking about the win from the exchange rate difference either. There are many articles on Seeking Alpha and elsewhere that dive into AMD's improved financial performance in Q3 and present bullish and bearish arguments over AMD's position in the microprocessor competitive landscape. I encourage readers to read those articles if they want an awareness of the overall business. I wish to talk specifically about cryptocurrency and its impact on GPU revenues in the near future. As a Canadian investor who has seen the absolute craze the blockchain gold rush has had on our stock market, I believe that analysts and even AMD's CEO has it wrong about this space.

AMD tanked on Monday after a downgrade from Morgan Stanley, with the price target being cut from $11 to $8. The analyst stated that he expects "cryptocurrency to gradually fade from here". CEO Lisa Su hasn't helped matters much by stating the following on the Q3 conference call:
In terms of the headwinds, we have the semi-custom seasonality and we're also predicting that there will be some leveling-off of some of the cryptocurrency demand. As we look at it, it continues to be a factor, but we've seen restocking in the channels and stuff like that. So we're being a little bit conservative on the cryptocurrency side of the equation.
In addition to these suggested headwinds, there appears to be a prevailing trend among both bears and bulls that downplay the growth in GPU business due to the cryptocurrency mining craze. It's somehow lower quality revenue, subject to faddish boom and bust periods. To me, a dollar is a dollar is a dollar. As long as the RX family keeps selling, I think AMD is a compelling buy at these levels. Then bears and bulls can argue until their faces turn blue over the fate of the CPU business at higher prices. The demand for the GPUs will be subject to the price of Ethereum, which is in constant heart attack mode every day from now to forevermore.  So from that perspective I get the concern. But my experience as a Canadian investor, there is no way the bust will come any time soon.

Enter Hive Blockchain and the parade of blockchain bandwagon jumpers

Hive Blockchain Technologies Ltd. (TSXV:HIVE) made its trading debut on September 18th through a reverse takeover of a shell listed on the TSX Venture Exchange. HIVE's business plan is setting up data centers and infrastructure to mine Ethereum, partnering with Genesis Mining. As in other words, it's not exactly rocket science or the cure for cancer. On the day of its debut, the stock closed at $0.97. A month and a half later and HIVE has risen to $4.48, over a billion dollars in market cap. In less than two months, HIVE has raised the following (all figures in $CAD):
Perhaps to investors in the United States, a company that has managed to grow to a billion dollar market cap from a shell and raise $76.5 million in less than two months isn't that impressive. But you have to understand us Canadians. When we go in on something, we go ALL IN:
  • The mining craze of the early to mid 2000's.
  • Peak oil shortly after that.
  • Weed stocks since 2014.
Our markets are known for heavy sector focus and the free flow of investment fund cash into those sectors. Blockchain and cryptocurrency looks like the next one as a whole host of bandwagon jumpers are getting in on the action and raising funds. I believe that this is just the tip of the iceberg:
  • Global Blockchain Technologies Corp. (TSXV:BLOC), an investment company intent on getting into the blockchain and digital currency space, has risen from $1.54 to $2.34 in less than a month after its change in focus to blockchain without having done much of anything so far.
  • LeoNovus Inc (TSXV:LTV) has risen from $0.10 to $0.55 since HIVE debuted, having announced a preliminary agreement with a Big 6 Canadian bank for blockchain hardened data storage and security software.
  • Fintech Select (TSXV:FTEC) is in the final stages of releasing thousands of point-of-sale terminals for bitcoin and other cryptocurrencies across Canada. API integration was completed last week. There are currently around 260 in Canada and 1,750 worldwide.  
  • Sheldon Inwentash, former Pinetree Capital (TSX:PNP) executive and the highest paid Wall Street CEO in 2010, has returned with a new capital pool ThreeD Capital Inc. (CSE:IDK) with the intent of getting into blockchain-related businesses. Read my article about this here
These are just a few examples of the blockchain and cryptocurrency businesses that are popping up all over Canada's stock markets. But the chase for quick cash in one the the world's most notorious markets for quick cash chasers isn't the only barometer for the cryptocurrency market. According to this article in September, jobs in the cryptocurrency industry increased by over 100% compared to the previous six months. Fidelity has been looking hard into blockchain assets and has admitted to starting a small mining operation in September. The setting up of futures markets will help miners to reduce the fluctuation of cash flows according to spot prices, making this a more viable business to more people. None of these are indications that crypto mining has peaked or is fading like what the Morgan Stanley analyst suggests.

Perhaps U.S. investors are more cautious or skeptical of new industries like this and that Morgan Stanley analyst or other bears can use that skepticism as a way to trash AMD. I understand the thought process behind the idea that cryptocurrencies are a house of cards ready to collapse at any time. I have written about this risk. But how are cryptocurrencies really that much more of a house of cards than the commodity futures markets or ETFs like SPDR Gold Shares (GLD) where far, far more paper trades than the actual underlying value of the goods backing that paper? Cryptocurrencies are like baseball cards or art. They don't have any inherent value, but they are worth exactly how much someone is willing to pay for them. And you can fetch 6-digits or more on the world's most sought after pieces of art or baseball cards, and it has been that way for years. So who knows how long this can last.

My experience is there is no indication that the cryptocurrency market and crypto mining markets are going to go away any time soon. The Morgan Stanley analyst is wrong about this being a fading revenue driver for AMD and AMD's CEO is wrong for being overly conservative about this industry, giving bears ammunition to say that AMD's strong Q3 performance will be short lived. I have taken advantage of that and managed to buy into a small position into AMD this week.


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