Digital Currency like bitcoin Ethereum a Tailwind for AMD Stock?

After spending the better part of its life in Intel Corporation’s (NASDAQ:INTC) shadow, Advanced Micro Devices, Inc. (NASDAQ:AMD) exploded in value last year.

What is behind AMD’s soaring valuation, and will it continue through 2017?

One part of the story is AMDs “IP monetization.” Don’t let the term scare you—it is just a fancy way of saying that companies pay AMD for the right to copy its patented designs.

The other part of the story is Bitcoin, or at least cryptocurrencies like Bitcoin.

Let me explain…

Digital currencies don’t manifest out of thin air—they are “mined” by powerful computers. These computers spend time solving complex puzzles, and with each solved puzzle, new tokens are awarded to the user.

Put another way, cryptocurrencies are “mined” using mathematics.

It takes a lot of computing power to crack these mathematical codes, but doing so can pay off big time. We’ve all heard tales of early Bitcoin miners who took possession of their BTC tokens at $3.00 or $4.00. It is now trading at $2,823.

Such extraordinary growth numbers leave most investors salivating. It leaves me wondering how these “mining” rigs are set up.

After all, there is hardware behind all software, and if you can find a company that manufactures the necessary parts for a mining rig, you’ve effectively found another way to profit from the popularity of digital currency.

Advanced Micro Devices AMD Stock Bitcoin Mining

Chart courtesy of StockCharts.com

Ethereum and AMD’s Radeon Chips

Graphics cards? What are you talking about?

I get that reaction all the time. Bear with me.

Ethereum uses similar technology to Bitcoin, but its goals are completely different.

Bitcoin wants to destroy fiat currencies and central banks, whereas Ethereum is looking to streamline business functions. For instance, Ethereum’s “smart contracts” help reduce friction in almost any area of business, not just in payments.

We’ve seen enormous uptake in these smart contracts, particularly in Russia, where they are being used by government agencies and major corporations.

A lot of people (myself included) believe that Ethereum’s goals are more acheivable than Bitcoin’s, which is why ETH prices soared this year. It was trading at $10.07 in early January; six months later, it is trading close to $400.00.

Cryptocurrencies require a little effort to wrap your head around, but considering that their upside potential stretches into five figures, they are worth the effort.

Without getting too technical, here’s a quick chart explaining why graphics cards are useful to complex functions like Ethereum mining, artificial intelligence, or driverless car technology.

Advanced Micro Devices AMD Stock Bitcoin Mining

(Source: “How GPU Acceleration Works,” by Mmanss (Own work) [CC BY-SA 3.0], Wikimedia Commons, December 7, 2013.)

There are simply more “cores” in a graphics processing unit, or GPU, than in a CPU.

As a result, the information can be split into smaller clumps and organized more creatively, which translates into greater computational power.

So cryptocurrency miners buy themselves a rig, cover the electricity costs, and mint their own money. It is the equivalent of having a printing press in your house.

People are more accustomed to this idea than they were a few years ago. I now meet finance professionals that are setting up their mining rigs, whereas a few years ago, the mining community was exclusively dominated by engineers and coders.

We’re witnessing the idea float up into the public consciousness.

As it does, demand for GPUs is bound to rise, and companies like AMD will likely reap the rewards.

Other Reasons for AMD Stock’s Ascent

To be quite honest, AMD was in the right place at the right time.

Rising demand for GPUs vaulted the firm to unprecedented heights, and a stroke of luck should be acknowledged as precisely that—luck.

It is sheer coincidence that Moore’s Law deteriorated around the same time as these tech trends emerged:

  1. Artificial Intelligence
  2. Driverless Cars
  3. Cryptocurrency

None of these words were in the public lexicon a decade ago, yet all of them require more GPUs. Self-driving cars, for instance, are expected to become an $87.0-billion market by 2030, meaning that an enormous amount of hardware is needed to scale up.

As a graphics chip maker, AMD was (and is) perfectly positioned to surf this trend. I see the share price continuing its upward trajectory through this year and the next.

On a less accidental note, I’m bullish on the company’s decision to license patents in China.

It was a master stroke, especially when you consider that China is often closed to U.S. tech companies. Local partnership is the only way in.

That is the beauty of IP monetization. It subtracts the headache of manufacturing, while adding a ton of revenue. Who would say no to that?

Just take a look at AMD’s joint venture with Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC).

AMD gains $293.0 million from the deal, simply by lending its expertise on server chips ($52.0 million in the first year of the deal). THATIC manufactures the chips and leverages its existing relationships within China. Sounds like a match made in heaven to me. (Source: “AMD announces x86 licensing deal, $293 million joint venture to build servers for China,” ExtremeTech, April 22, 2016.)

Conclusion

Like Warren Buffett and Benjamin Graham, I believe the best investments are the ones you can hold for 10, 20, even 30 years.

AMD has (against all odds) become one of these investments.

It is now a “cutting edge” microchip maker with growing market share. The company’s accidental ascension is likely to continue as long as these trends hold steady, so I’m prepared to remain bullish on AMD stock for the foreseeable future.

Article By Gaurav S. Iyer