Despite all the hype about artificial intelligence, hyper-scale data-centers, automated driving and augmented reality, Advanced Micro Devices, Inc. (NASDAQ:AMD) stock, often labeled as a beneficiary of these secular growth markets, is far from a good long-term investment at these levels. In fact, AMD stock looks more like a sideways-bound trading stock than anything else.
As proof, look at how AMD stock has performed this year relative to its peers.
So far in 2017, red-hot leader Nvidia Corporation (NASDAQ:NVDA) has seen its stock double. Often forgot about Intel Corporation (NASDAQ:INTC) has seen its stock rise more than 20%, with essentially all of those gains coming over the past 3 months.
AMD stock? Its up just 2% in 2017. And all of those gains came early in the year. Sentiment shifted quickly. Right now, AMD is trading nearly 25% below below its 2017 highs. NVDA and INTC are trading right near their 2017 highs.
Why? Valuation. AMD stock trades at 89 times this year’s earnings estimate. That is simply too rich of a multiple for a chipmaker. NVDA stock trades at 51x this year’s earnings estimate, while INTC stock trades at 14x this year’s earnings.
Meanwhile, bullish sentiment in this sector is shifting from AMD to INTC. Intel’s new line of Coffee Lake processors launched with great success recently. That was viewed as a threat to the secular AMD growth narrative. When you’re trading at 89x earnings, any unforeseen risk materializing results in a big loss of value.
With AMD caught on the wrong side of a sentiment shift and trading at a hyper-rich valuation, there really is no reason to own the name at these levels. All else being equal, I’m a buyer around $9. Here’s how I arrived at that price…
Why AMD Stock Won’t Head Higher Any Time Soon
The big sign that AMD stock isn’t going up anytime soon is that despite a bunch of good news in the chipmaker space, AMD stock hasn’t really done much.
Firstly, Intel and AMD are teaming up to create a new computer chip. The chip will combine an Intel processor with an AMD graphics unit and cater to gamers and content creators. It is also important to note that the chip won’t compete with AMD’s Ryzen Mobile chips.
This is huge news for AMD. The partnership is a step towards getting the company back on the right side of a shifting trend at essentially no cost to its current business.
Secondly, news has broke that Broadcom Ltd (NASDAQ:AVGO) wants to acquire mobile chipmaker Qualcomm, Inc. (NASDAQ:QCOM), indicating that there is M&A demand for depressed chipmakers (like AMD stock, QCOM stock has struggled as of late).
Despite these ostensible tailwinds, AMD stock hasn’t really done much. It bounced hard when it dipped into the $10 range in early November after a 25% cut in value following earnings, but that has been a critical resistance level for this stock through essentially all of 2017. Since then, the stock has simply traded sideways in the $11 range.
Again, I come full circle to valuation. Investors don’t want to pay 89x earnings for what is supposed to be a 40% growth narrative into 2019. And why should they? That multiple represents a near-125% premium to growth potential.
The S&P 500 is trading at 19.8x earnings for 10.4% growth into 2019. That multiple is just a 90% premium to growth potential.
Apply that same premium to AMD stock. You get a “fair” price-to-earnings multiple of 76. A 76 multiple on this year’s $0.13 earnings estimate implies a fair share value of just under $10. I buy at a discount to that fair value, so I’m not biting on AMD stock until it gets to around $9.
Bottom Line on AMD Stock
An overstretched valuation and shifting market sentiment have kept AMD stock stuck in neutral for most of 2017.
This sideways run will likely continue, because sentiment continues to shift and the valuation remains rich.
All else equal, AMD stock doesn’t look like a value buy until it dips below $10.
As of this writing, Luke Lango was long NVDA and INTC.
