AMD shares might be poised for a breather here.

With AMD Inc.'s (AMD) stock now up over 200% from its spring lows, it would hardly be surprising to see some profit-taking.

At the least, the chipmaker's giant run-up means that any bad news that catches markets by surprise -- say, for example, tougher-than-expected competition from Intel  (INTC) and/or Nvidia (NVDA) thanks to new product launches -- is likely to cause some of the momentum traders who have recently embraced AMD to head for the exits. That might hold even if business trends still mostly look good, as is the case right now.

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What Has Driven AMD Higher

I've been bullish on AMD for much of 2018, arguing that its Ryzen (PC), Ryzen Threadripper (enthusiast PC/workstation) and Epyc (server) CPU lines all appear well-positioned to take share from Intel, and that continued delays for the mass-production of CPUs relying on Intel's 10-nanometer (10nm) process node should pave the way for additional share gains in 2019.

That thesis still generally looks intact. Epyc has been gradually making headway with cloud providers and traditional enterprises, and AMD's goal of achieving a mid-single digit server CPU share by year's end looks achievable. And while Intel's gradual rollout of 8th-generation Core PC CPUs has spelled tougher competition, AMD has done a good job of countering in the desktop and workstation markets by launching second-gen Ryzen and Threadripper parts that deliver moderate performance gains relative to their predecessors and are priced fairly aggressively.

Meanwhile, Intel disclosed on its July earnings call that the first 10nm PC CPUs to see volume production won't be available until the 2019 holiday season, and that the first 10nm server CPUs aren't due until 2020. AMD, by contrast, recently began sampling server CPUs and GPUs relying on a 7nm Taiwan Semiconductor (TSM) process that's seen as roughly on par with Intel's 10nm process, and looks primed to launch 7nm PC and server products on a large scale next year -- possibly by the first half of 2019.

As the magnitude of Intel's manufacturing woes -- and the opening that they provide AMD -- has become better understood, analysts have been tripping over each other to upgrade AMD and/or hike their price targets. On Monday, AMD surged to fresh highs after Wells Fargo's Aaron Rakers upped his target by $14 to $34, arguing the company can eventually deliver over $2 billion in annual server CPU revenue. On Tuesday, Rosenblatt Securities's Hans Mosesmann upped his AMD target by $10 to $40.

Short-covering has also given AMD a boost. Whereas 192.6 million AMD shares (over a fifth of the float) were shorted as of April 13, that number had dropped to 146.3 million by August 15th, and it wouldn't be surprising to learn that short interest has fallen further since then. In addition, as many other chip stocks have come under pressure for various reasons, momentum traders seem to have flocked to AMD.

An Elevated Valuation

Thanks to its huge summer rally, AMD is now pricing in a healthy amount of future share gains, something that arguably wasn't the case when the stock was trading in the low single digits this spring.

Shares now trade for 34 times a 2020 EPS consensus of $0.87. While that estimate could end up being conservative if AMD makes the most of the opportunity that Intel is giving it, even 2020 EPS of, say, $1.25 wouldn't exactly spell a low valuation. At least not when compared with the multiples that many chip peers trade at following a rough few months.

Intel and Nvidia Product Launches

In late August, Intel unveiled new 8th-gen Core notebook CPUs for its U-series and Y-series families. The U-series products, which target "mainstream" thin-and-light systems, deliver turbo clock speed and battery life gains relative to their predecessors, and directly square off against AMD's Ryzen Mobile family, which launched in late 2017 and saw strong growth in Q2.

And in October, Intel will reportedly launch its first 9th-gen Core CPUs: They consist of desktop chips for Intel's oveclockable "K" series family, that include its first two mainstream 8-core parts. Leaked benchmarks suggest healthy performance gains relative to comparable older "K" series parts. While Intel's manufacturing teams have badly misfired, its CPU engineering teams are doing a decent job of making lemonade out of lemons.

Nvidia is three weeks removed from unveiling the first gaming GPUs based on its Turing architecture: The RTX 2080 Ti, RTX 2080 and RTX 2070. Nvidia is promising solid performance gains for existing games relative to high-end GPUs based on its Pascal architecture, as well as the ability to enable real-time ray tracing in new games. In addition to spelling tougher competition for AMD's high-end Vega gaming GPUs, the Turing launches could give Nvidia more leeway to aggressively price Pascal GPUs in the mid-range, where AMD has a relatively large presence.

Next year, AMD should be able to effectively counter Intel by launching 7nm Ryzen CPUs that use its next-gen Zen 2 CPU core architecture. And the company's planned launch of 7nm PC GPUs based on its next-gen Navi architecture should at least put it on stronger mid-range footing. However, until then, Intel and Nvidia's moves will make things a little more challenging for AMD in some key market segments.

The Big Picture

AMD still has quite a lot going for it as a company. However, its stock now has a more limited margin of error than it did a few months ago. While a good case can be made for staying the course if one bought AMD at lower levels and is looking to hold long-term, those who haven't bought yet should probably wait for a better entry point.

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