Is This Bounce in Advanced Micro Devices, Inc. Worth Chasing?

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Here is the bounce everyone was looking for in once-loved, now-feared Advanced Micro Devices, Inc. (NASDAQ:AMD) stock.

AMD Stock: Is This Bounce in Advanced Micro Devices, Inc. Worth Chasing?

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AMD stock, which had lost nearly a fourth of its value in a week following its latest earnings report, is up more than 5% today after the company announced a key partnership with competitor Intel Corporation (NASDAQ:INTC).

According to the Wall Street Journal and confirmed by AMD management, 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 towards 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 gets them on the right side of a shifting trend at essentially no cost to its current business. Plus, news broke that Broadcom Ltd (NASDAQ:AVGO) wants to acquire mobile chip-maker Qualcomm, Inc. (NASDAQ:QCOM), indicating that there is M&A demand for depressed chip-makers (like AMD stock, QCOM stock has struggled as of late).

But does all this good news mean that AMD stock is a buy at these levels?

I don’t think so. I’m revising my growth estimates slightly higher to account for what I think will be bigger growth due to continued partnerships with Intel and potentially other chip-makers.

But I still think AMD stock is overvalued. My number on the stock before was $8. Now its $9. Here’s how I get there.

Intel Partnership Is a Big Deal for AMD

The partnership with Intel is big from a sentiment standpoint because, as I’ve pointed out before, there was a huge sentiment shift in the markets away from AMD and towards INTC.

It started with Intel launching its new line of Coffee Lake processors. Sentiment around the new processors was quite bullish, and they were looked at as a major threat to the secular AMD growth narrative. Analysts expressed dire concern (one analyst pounded on the table with his $5 price target on AMD stock).

Then AMD reported a blowout quarter and no one seemed to care. Concerns over buffed up competition remained in the spotlight. AMD stock fell 25% in about a week.

Meanwhile, Intel stock rallied big after its recent earnings report. In fact, since the start of September, INTC stock is up about 33%.

Therefore, its good to see AMD somewhat get on the right side of this sentiment shift. The narrative now partially shifts from “Intel eating AMD’s lunch” to “Intel and AMD teaming up to take on leader Nvidia Corporation (NASDAQ:NVDA)”. That narrative shift plus AMD stock trading near the bottom of a well-defined 2017 trading range leads to AMD stock popping big.

But the Numbers Still Aren’t Great For AMD

With this bounce, AMD stock now trades at 90 times 2017 earnings estimates.

That is a steep price to pay for a narrative that is still plagued with competitive concerns. Granted, the more Intel and AMD work together, the more those competitive concerns will drop. That is why I am upping my long-term revenue growth rate to 20% (from 15% prior) and my long-term earnings growth rate to 40% (from 35% prior).

But 90x 2017 earnings is still too steep of a price to pay for 40% growth potential. The S&P 500 Index is trading at 17.9x 2017 earnings for 10.7% growth potential. That is a price-to-earnings/growth (PEG) ratio of about 1.8.

Apply that PEG ratio to AMD and you get a “fair” P/E multiple of about 72. A 72x multiple on 13 cents earnings estimates implies a fair value of just over $9.

Bottom Line on AMD Stock

The Intel partnership is great news because it shifts the market narrative away from “Intel eating AMD’s lunch” to “AMD could grow with Intel.” Plus, its always great to see a peer (QCOM) get a buyout offer, as it shows acquisition interest in the space is relatively high.

But AMD stock remains fundamentally over-valued. I don’t think this stock becomes a value-oriented buy until it falls into single-digit territory.

As of this writing, Luke Lango was long INTC and NVDA.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/bounce-advanced-micro-devices-inc-amd-stock-chasing/.

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