Advanced Micro Devices, Inc. (NASDAQ:AMD) has been hitting some turbulence lately. That’s largely thanks to Goldman Sachs analyst Toshiya Hari, who threw cold water on shares with a “sell” rating on AMD stock.
Investors took note, scattering to send shares down by 6%. No surprise — Advanced Micro is hyper-sensitive, especially considering how many investors are sitting on triple-digit gains.
Why take the risk?
Hari offered up several reasons for his bearishness on AMD stock. One is that the valuation appears to be out of sync with the underlying fundamentals; Hari thinks that a fair value is $11. It’s not a crazy argument, as Advanced Micro has spiked from less than $2 in March 2015 to the $13 area and now trades at 43 times forward earnings estimates. By comparison, Nvidia Corporation (NASDAQ:NVDA) is at 28X and Broadcom Ltd (NASDAQ:AVGO) sports a 14 multiple.
But perhaps Hari’s other concern is much more serious: the threat of competition. While AMD’s run has come amid improved fundamentals based on increasingly superior products, NVDA and Intel Corporation (NASDAQ:INTC) are no slouches. These tech operators not only have enormous resources but dominant positions in their market categories. What’s more, they may be willing to engage AMD in price wars if they must.
Hari’s not the only skeptical analyst out there, as the consensus price target sits at $12.20, below current prices.
AMD Stock and Momentum
While the bears have good arguments, I think they miss the point.
Advanced Micro Devices is at a major inflection point, which has attracted numerous momentum traders that couldn’t care less about valuation. They see a strong growth path and exciting developments, and that’s enough for them.
AMD should continue to deliver on this front.
CEO Lisa Su has crafted a great strategy including several years of disciplined R&D efforts. For example, there is the Ryzen 7 CPU, which has garnered standout reviews. The technology is poised to snag a lucrative share of the massive gaming cateogry. There is also the Vega GPU, which is gunning for Nvidia, as well as Naples, a chipset that should give INTC a run for its money in the datacenter market.
AMD has already been gaining traction with customer demand. Some of the marquee names include Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Alibaba Group Holding Ltd (NYSE:BABA), which hosts 35% of the websites in China.
AMD also has a platform that is based on outsourcing manufacturing to third parties, such as Global Foundries and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). This allows for much more focus on innovation and product development — but also means that the company can quickly scale production according to customer needs.
In the meantime, Su is continuing to invest in longer-term opportunities like artificial intelligence, virtual reality and the internet of things. For example, last week, Su announced a deal to buy startup Nitero, a leader in millimeter wave technologies that allow for wireless VR and AR headsets. Keep in mind that current systems on the market — from HTC, Facebook Inc (NASDAQ:FB) and Sony Corp (ADR) (NYSE:SNE) — require unwieldy chords.
If anything, this has likely been a problem with customer adoption.
This isn’t to imply that AMD stock will post triple-digit returns again last year. That’s a stretch.
But Advanced Micro is in the midst of a transformative upswing, driven by multiple product launches in red-hot markets. Considering that, it seems like a good bet that AMD should continue to outperform the broader market.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.