Why Shares of Advanced Micro Devices Inc. Quadrupled in 2016

By Timothy Green Markets Fool.com

Image source: AMD.

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What happened

Shares of Advanced Micro Devices (NASDAQ: AMD) gained 295% in 2016, according to data provided byS&P Global Market Intelligence. A return to revenue growth, a series of deals that bolstered the balance sheet, the launch of its mainstream Polaris graphics cards, and optimism regarding new CPUs and GPUs set to launch in the coming months drove the stock higher.

So what

AMD entered 2016 in rough shape. Revenue in 2015 slumped 28%, leading to a net loss of more than $400 million. Cash was dwindling, approaching the lower limit of the company's target range. On top of all that, AMD's core CPU and GPU products were largely not competitive with those of Intel or NVIDIA.

AMD took a few steps in 2016 to raise cash, giving it some much-needed breathing room that boosted investor confidence in a turnaround. A deal to create a joint venture in China around the company's x86 server technology raised $293 million in licensing fees, with the potential for royalties on sales of chips. More cash was raised later in the year when AMD sold new common stock and convertible notes, further bolstering the balance sheet.

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Data by YCharts.

AMD returned to year-over-year revenue growth during the second quarterand posted even stronger growth during the third quarter. The launch of the Polaris mainstream graphics cards lifted the computing and graphics segment, while strong demand for semi-custom game console chips drove growth in the semi-custom segment. Polaris hasn't been as big of a success as NVIDIA's Pascal graphics cards, at least according to Steam's hardware and software survey numbers, but it did help return the company to growth.

AMD revealed some information about Ryzen, its upcoming CPU, and Vega, its upcoming high-end GPU, last year, adding fuel to the fire. The market is betting that AMD will become competitive in both the high-end CPU and GPU markets when those products launch during the first half of 2017.

Now what

There's no question that AMD is in a stronger position than it was at the end of 2015. The top line and balance sheet are looking stronger, and Ryzen and Vega have the potential to return the company to profitability.

But investors should not forget AMD's long history of over-promising and under-delivering. The Bulldozer family of CPUs launched in 2011 turned out to be a complete disaster for the company. The Fury line of high-end GPUs launched in 2015 didn't even move the needle despite AMD hyping up its use of high-bandwidth memory. And Polaris, while producing some growth for the company, has been completely overshadowed by NVIDIA's Pascal.

2017 may be different. Based on what AMD has said so far, both Ryzen and Vega have some serious potential. But if either product comes up short of expectations, the stock's impressive gains from last year could quickly vanish.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.