Sold remaining AMD stake $47. Cost basis of $11. This run up has been insane.
Great decision buying AMD.
It continues to surprise me how some (only a few) companies can re-invent themselves. My son (who is in grade 12) alerted me about 2 years ago to what was going on at AMD; he and his buddies are into technology and he explained to me that AMD was a company on the rise. Alas, i was too busy thumb sucking to do anything about it. I use it as an example with him to how small investors can do well if they do what Peter Lynch advises: take advantage of what you see in your circle of competence.
I was quite torn about selling it since my cost basis was so low. I like the management team and what they’re doing. I think they have been executing very well. Solid products, good growth in multiple segments and a really solid pipeline. But the valuation has gone bananas. 200+x earnings is too rich for me. But I’m definitely looking for another entry point. It’s hard to say whether this will trade at a fair value anytime soon.
Thanks
Excellent trade. What made you choose to sell at 200x rather than say, 150x? I am just curious because one area I would like to improve on is with handling these "non circle of competence" buy sell decisions. I can look at a real estate company and say, Im selling at 5% discount to NAV; easy. But holding AMD from 10 to 47 or whatever obviously involved some sort of valuation work and discipline. And like I said, since the earnings multiple was never really all that traditionally obvious, I am curious your thought process; if you dont mind sharing.
Also, if you wanted to hang on or rebuy, in the future you can just utilize shorting long dated calls. If you wished to one day repurchase AMD at 30, just sell something like the January 2021 $30 call for $18-19. You get a little extra premium on your sale, are position neutral with no tax obligation yet, and if your bearishness is warranted you then just cover the call position into the decline effectively putting back on your long position- STILL with a long term basis.
First and foremost I'm going to say that I view AMD as the "millennial stock that has merit". It's sexy/familiar enough that it's trendy, but the business and product lines/segments are of good enough quality to help people justify the outlandish valuation.
Leading up until April 2018 the P/E was hovering right around 50. This was obviously too high as it was overpriced on fundamentals. But the sentiment for AMD was really taking off since the launch of Ryzen and Threadripper in Feb/Mar 2017. Then you had the launch of EPYC in June of 2017. You can almost see the curious sentiment of this in the spread as it traded between high 9-12 range for 16 months. leading up to April 2018. I believe this was supported by the constant flow of new products and all that was keeping stock from going nuts was the enterprise side results.
Depending on results of Q1 2018, Q2 2018 earnings had almost a perfect setup. AMD had Computex 2018 in June and then Earnings end of July. Why would they go if they weren't going to reveal something positive/new? I bought in Dec 2017 (starter) and in April (large position) around 10 a share before the Q1 earnings April 25th. I was planning on selling my position before ER in July for a quick turnaround. But in May we had a HPE rep come pitch their new servers which were running the EPYC 7001 AMD chips. I talked to the lady after her sales pitch and asked how they were selling. Sure this is anecdotal, but she said they were selling relatively well. The chips seemed like they would be good money savers for enterprise companies without sacrificing performance to a significant degree. They were about 1/4 the cost of Intel's Xeon chips and claimed they would reduce VM cost by 50%. We also have a few HP engineers staffed at my site and I discussed this with them. They heard favorable opinions (no hands on experience personally) from coworkers.
So I took a bit of a gamble and held my position until Computex 2018 to see if AMD would release any news. They released a ton of positive news one month before earnings. HP was expanding their EPYC server line, Cisco was adopting EPYC, Tencent was using them for cloud. Call it a gut feeling but I felt Q2 2018 was going to be an inflection point.
- Solid product line
- Management was executing well
- Accelerated growth in multiple segments Q1, Q2 2018
- Positive results at Computex 2018
- Add in the overwhelming positive sentiment, fomo and the bandwagon investors
- Turn around story
- Inside my circle of competence
I sold roughly 1/6th of my total position after Q2 2018 earnings for 25/sh. The PE was nearing 100 at that point and I didn't feel comfortable with that. Ever since Q1 2018 I felt that a PE around 50 had relative support. Sure, it wasn't justified fundamentally but with all the things I listed above I felt that the market was curious enough to allow this ridiculous PE to exist.
We didn't see the full breadth of EPYC backed servers hit the markets until Q1 2018 from HP and Dell vendors. I figured this was going to take a few quarters to see results (this was reflected in Q2 with positive guidance). When we hit the slowdown in Oct 2018 there was quite the pullback. AMD announced HPE ProLiant DL325 Gen10 and Gen 2 EPYC processors. I figured this was a decent buy opportunity and the share price was seeing solid support around 50 P/E again. I bought a smaller position around 17 a share and brought my cost basis right around 11. Up until then, EPS had been increasing every Q starting in Dec 2017. Now we were starting to see a decline yet the P/E is running away to these ridiculous levels.
I simply was riding the sentiment following the Oct-Nov market dip. I'll be the first to admit I was really lucky with my cost basis and buy timing. This has been by far my most risky play/position. I still like the company and the management team at AMD. Their future product line seems intriguing as AMD will have products on the market that Intel cannot compete with due to time frame constraint. I think the sentiment is wearing off for AMD. Intel has been a sleeping giant and will certainly leverage their R&D in the future. The question now is how much market share can AMD capture? That is a much more difficult task than proving you can create competitive products. As LC said 75% of the time AMD falls short. I'll be looking to buy when they come back down to earth (pending market share gain).
I think we will see a large sell off after the 1st of the year for the very reason Spek stated above.
Also thanks for the advice on the idea of shorting long dated calls.
