Avoid Advanced Micro Devices, Inc. (AMD) Stock While It’s Correcting

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Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is mired in a slump, far past correction mode and into full-blow bear-market territory. AMD stock popped as much as 11% higher on July 25 after smashing second-quarter estimates, but it has been nothing but down since then, with shares off more than 22% in less than a month.

Avoid Advanced Micro Devices, Inc. (AMD) Stock While It's Correcting

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Investors may be tempted to buy this dip, but my advice? Wait.

AMD is no stranger to big, vertical moves, but historically, it has followed these moves up with rangebound trade and significant declines.

Sure, history is no indicator of future returns, but the fundamental picture doesn’t look much more promising for AMD stock.

Does History Tell Us Something About AMD?

Advanced Micro Devices — like many other companies — tends to struggle when expectations are high and the valuation is rich. AMD’s rally from $2 from $11 in 2016 isn’t unfamiliar, but neither is its largely rangebound 2017 following said bull move.

In 2009, AMD put together a similar rally, from $2 to $10, then traded in a range for nearly two years before falling back down into low single digits. A plethora of headwinds — decline in global PC shipments, top management turnover, manufacturing glitches, and intense competition — kicked in around the early part of 2012, and sent shares reeling.

By the end of 2012, AMD was a $2 stock again.

I don’t believe AMD stock is headed back to $2. I think Advanced Micro Devices is more appropriately positioned in secular growth markets now than it was in 2010, and some of those same headwinds won’t rattle the company as they did before.

I am saying that when shares are richly valued like they are today, AMD is a frustrating stock to own. Good news doesn’t propel the stock as much, while negative headlines tend to weigh for days.

The real problem is that AMD stock is much more richly valued today than it was in 2010. Shares currently trade at 2.3 times sales; even at its peak in 2009-10, they traded at a P/B closer to 1.3. That’s despite revenue growth looking roughly the same, and Advanced Micro actually recording GAAP profits back in 2010 (not the case today).

AMD by the Numbers

I have said before that AMD’s best-case scenario is $750 million in net profits in five years. This assumes 10% annualized profit growth, which to me actually feels aggressive.

Revenue growth is trending in the mid- to high teens right now, even with the cryptocurrency mining tailwind, which isn’t a given going forward. As we all saw from NVDA’s most recent earnings report, the market doesn’t really like this cryptocurrency mining tailwind because it’s a wild card.

As revenues scale, then, but the cryptocurrency tailwind fades, a revenue growth rate of 10% seems appropriate.

The $750 million net profit projection also assumes management hits long-term margin targets. That includes 40% gross margins and 14% operating margins. Those targets are achievable given trends toward a more margin favorable revenue mix. Steady revenue growth should also allow for significant operating expense leverage.

Still, that means the best-case scenario (see my previous article for more on how I got there) is for $750 million in net profits in five years. The company currently has a market capitalization of $11.3 billion, so Advanced Micro is trading at 15 times earnings that are five years out.

Bottom Line on AMD Stock

Advanced Micro is much more of a company than it was at similar stock-price situations in the past. But valuation is a serious concern even with those better operations.

The idea that AMD stock trades at a reasonable P/E, but only on hopeful earnings that may come, and even then, only 15 years out, and even then, at current prices, implies much less upside from here in a multiyear window.

I don’t think 2016’s rally results in a massive crash like it suffered in 2012, or even 2007-08. But I do think investors’ money is better spent elsewhere.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/avoid-advanced-micro-devices-inc-amd-stock-while-its-correcting/.

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