It’s a big week for Advanced Micro Devices, Inc. (NASDAQ:AMD). The company’s share price has skyrocketed from around $2 a year ago to above $15.50 this week ahead of the launch of its new Ryzen processors. The launch of the new chips has been a highly anticipated event, and market expectations are clearly sky-high.
Unfortunately, as seasoned traders know, sky-high expectations can often spell trouble for red-hot stocks. In fact, there are at least three good reasons that AMD stock investors should consider cashing out of their positions now.
AMD Stock Is Overvalued
Wall Street analysts are projecting that Ryzen processors will drive 32% year-over-year revenue growth for AMD by fiscal Q2. That’s certainly some impressive growth. Unfortunately, all of that revenue growth and much, much more has already been priced into AMD stock. Incredibly, AMD’s market cap has increased nearly sixfold in the past year. It’s going to take a lot of quarters of 30% sales growth to justify 594% market cap growth.
Even with the impressive projected growth numbers, analysts are currently only calling for EPS of -1 cent per share by fiscal Q2. They aren’t projecting Advanced Micro Devices will turn a profit until fiscal Q3 at 7 cents per share. That would represent AMD’s first profit in years.
Despite the generous growth projections, AMD’s forward price-to-earnings ratio currently sits at a bloated 49.5. If Ryzen falls short of projections, that number could end up even higher.
At this point, Ryzen may need to deliver sales numbers well above and beyond the market’s expectations to even justify the stock’s current share price. At the stock’s current share price, it’s hard to make a case for additional upside in the near-term.
Ryzen Launch May Be a “Sell the News” Event
Sometimes it doesn’t matter how well the launch of a new product performs, traders still see the event as a selling opportunity. A great example of this “sell the news” mentality is Nintendo Co. Ltd (ADR) (OTCMKTS:NTDOY) sell-off following the release of the Super Mario Run game in December.
After NTDOY’s Pokemon GO momentum dried up, investors were banking on big numbers from Super Mario Run. When the game launched, it surged to the top of the download charts and broke international revenue records. Within a matter of days, NTDOY stock was down more than 11%.
At some point, the hype surrounding an event becomes so intense that it is impossible to please the market. Ryzen is four years in the making, and investors expect it to dominate the CPU market. Traders sitting on nearly 600% gains are likely looking for any excuse to cash out. Many of them may see the Ryzen launchas the end of the line.
Even Wall Street Bulls Are Skeptical of AMD Stock Upside
Wall Street analysts have loved AMD stock in recent months, but even Wall Street sees very little upside remaining. Since Dec. 1, Loop Capital, Bank of America, Morgan Stanley, Mizuho, Canaccord Genuity and Rosenblatt have all either upgraded to or reiterated “buy” ratings for AMD. Yet since early December, AMD stock has surged another 60%-plus.
At this point, the total number of buy/outperform ratings outnumbers the number of underperform/sell ratings 10 to 3. Yet surprisingly, the average analyst price target for AMD stock is roughly 30% lower than its current share price.
Analysts may recognize that market dominance can be fleeting, especially in the technology space. Performance tests have shown that Ryzen processors currently outperform rival Intel Corporation (NASDAQ:INTC)’s Core i7 chips. But investors shouldn’t expect INTC to rest on its laurels and simply surrender market share without a fight. Ryzen now has the bullseye on its back, and investors can expect INTC and other competitors to use their much larger resources and market presence to bring the heat on Ryzen in the near future.
Ryzen has clearly been a game-changer for AMD stock in the past year. But at this point, the risk/reward balance is skewed too much to the downside to justify owning the stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.