The crazy hype over cryptocurrency mining is one of the reasons why I went long again on Advanced Micro Devices (NYSE:AMD). More people are joining the Litecoin and Dogecoin addiction which caused global wide shortage of R9 Radeon products over the past recent months.
The surge in demand allowed retailers like Newegg to sell R9 Radeon Series GPUs at a 30% premium over AMD's suggested retail price tags. Litecoin miners are eager to pay more than $700 for each R9 290X cards. There was even a time when the 290X was so scarce, that Newegg sold R9 290X GPU cards for as high as $899.99.
The prices have gone down a little bit but they are still above the official retail price tags. The Sapphire AMD Radeon R9 290X now retails for $709.99 online. Amazon also offers several R9 290X variants for less than $699. However, I'm again expecting a surge in demand because the Litecoin mining crowd has just been joined by a new army of Dogecoin miners.
AMD Should Not Fear Unsold Inventories
It is sad that AMD failed to take into consideration the altcoin mining customers when they made their production runs for R9 Radeon cards last year. The shortage and bloated prices of the R9 series could have been prevented. AMD would have profited more if the company produced double the number of the R9 Radeon cards that miners covet.
Instead of AMD investors reaping the most benefits from shortage-causing frenzy for Radeon cards, it was retailers like Newegg who gained more money from the massive demand for R9 Radeon cards. Nevertheless, the altcoin mining industry will continue to grow.
Litecoin and Dogecoin will most likely achieve the same size of the Bitcoin industry. New types of digital peer-to-peer currencies will also emerge to keep this avenue well worth nurturing for AMD.
AMD's GPUs has long been the preferred choice of miners. The company's Graphics Core Next Architecture made the Radeon cards better at Scrypt-based hash processing than Nvidia (NASDAQ:NVDA)'s GPUs. In fact, Radeon's Graphics Core Next's technology made AMD GPU cards competitive again with ASICs - the custom chips dedicated to altcoin mining that most Bitcoin miners now use.
As the number of Litecoin and Dogecoin miners increases and as time goes by, the harder it will be for people to generate coins. If the Bitcoin history is taken into account, there will be a growing demand for more powerful and more energy-efficient mining GPUs. AMD should do its best to meet the said requirement of crytocurrency customers.
The specter of write-offs due to unsold GPU inventories is something I am aware of. However, I see the monetary reward outweighs the risk. I wish Rory Read would also consider creating a custom Radeon card specifically designed for Litecoin or Dogecoin mining.
The company can gain more income if it directly bulk-sold the said product to crytocurrency miners, bypassing distributors. AMD needs to squeeze every little cent of profit it can from its GPU division.
Nvidia's Maxwell is a Threat
I am worried over Nvidia's latest GPU products based on its new Maxwell Architecture. The new Maxwell-reference design, a $139 Nvidia GTX 750 Ti is a 60-Watt card that delivers 242 kh/s hashrate. It is not far behind the peak hash rate performance of the upcoming 150-Watt AMD Radeon R7 265.
The preferred and trusted status of AMD's mining-friendly GPUs will not hold for long once Maxwell's energy efficiency is proven. The power savings from the 750 Ti will eventually coerce miners to buy it instead of the $149 Radeon R7 265.
Furthermore, should Maxwell really allow Nvidia to produce high-end GPUs which delivers the same hash processing power of the R9 290x at less than half the energy-requirement, Nvidia GPUs will become the new favorite of crytocurrency miners.
AMD is therefore required to immediately address the power-efficiency advantage of Nvidia's Maxwell GPUs. It will not only be miners that will defect to its rival. Gamers will also flock to Maxwell graphics accelerator cards.
The gaming population is much larger than the digital coin mining industry. Gamers are mad over the recent inflated prices and scarcity of R9 Series Radeon cards. Many old customers have switched alliance to Nvidia. Such gamer defections makes it hard for AMD to convince game developers and game engine companies to support Mantle.
The inventory-clearing zealousness of Litecoin and Dogecoin miners did not help AMD stem the 10.4% Quarter-to-Quarter decrease in PC graphics sales for Q4 2013. The company suffered a shocking 26.7% drop in notebook APU sales due to the company being late in delivering new parts. The discrete GPU shipment for notebooks also saw a drop by 6.7%.
Should AMD fail to quickly neutralize the Maxwell threat, my hope of seeing the share above $6 by December is a mirage. Despite the recent impressive advances of AMD, the company's high debt load makes the stock highly vulnerable to negative market reactions. GPU revenue is now central to AMD's recovery, subsequent reduction in desktop and notebook graphics sales in the next three quarters is dangerous.
AMD needs to substantially increase its production of GPUs to satisfy the demand. The digital money mining boom is certainly NOT a bubble industry. Bitcoins, Litecoins, and Dogecoins are here to stay for a very long time. The GPU business is now integral to AMD's success, protecting its lead in crytocurrency mining is of paramount importance.
It is very important for the company to quickly come up with an equalizer against the new Maxwell Technology. Nvidia, unlike AMD was last year, is most likely going to produce enough units of Maxwell GPUs to counteract any shortage in supply caused by avaricious Litecoin/Dogecoin miners. Gamers, unlike miners, are easily outraged when GPUs they desire are selling 20% higher than what AMD said they should sell.
While it's hard to trust Wall Street analysts, AMD did get a recent BUY recommendation from Ascendiant Capital. The said firm also gave a $5.00 price target for AMD. Even TheStreet raised their rating for AMD from Sell to Hold.
These positive vibes are worth noting. As for me, AMD is a strong HOLD. If you have the extra money, you can risk buying a few more shares before the next earnings release. The company might deliver better-than-industry-expected numbers again this April. For the three previous quarters, AMD did beat Wall Street's predictions.
Disclosure: I am long AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.