There’s no denying the turnaround that has taken place at Advanced Micro Devices, Inc. (NASDAQ:AMD). Two years ago, AMD stock traded below $2. Given the company’s debt, and secular declines in the PC market, bankruptcy wasn’t out of the question.
Advanced Micro Devices seemed barely competitive with larger rival Intel Corporation (NASDAQ:INTC), its role limited largely to cheaper, low-end desktops and notebooks.
At the moment, this is a very different company. AMD stock is coming off a 2017 in which revenue rose 25%, and non-GAAP operating income rose 584%.
The Ryzen line is taking aim at Intel’s dominance in higher-end PCs. The Radeon RX Vega GPU series is challenging Nvidia Corporation (NASDAQ:NVDA) in gaming and, notably, cryptocurrency. And the Epyc line makes AMD a potential player in the fast-growing datacenter as well.
AMD simply had an incredible 2017, in terms of both fundamentals and product development. And yet, Advanced Micro Devices stock actually has declined 8% over the past year. After a ~600% gain through 2016, the stock basically hasn’t moved in fourteen months.
And so the question looking forward is: what gets AMD stock out of its range? As I’ve argued for some time, I still don’t think there’s a great answer to that question.
Q1 Earnings
AMD’s Q1 report seemed a microcosm of the issues facing AMD stock. Q4 revenue and EPS beat analyst expectations handily. Q1 guidance for revenue and gross margin was well ahead of the Street.
Directional guidance on the Q4 conference call for full-year 2018 results led analysts to raise 2018 EPS estimates: the consensus figure climbed to $0.39 from $0.36 in the days after earnings.
It was a great quarter for AMD – something close to a blowout. After some mixed after-hours trading, Advanced Micro Devices stock rose on the news, gaining 6.8%. But the broad market turned bearish, cryptocurrencies kept falling and AMD turned south.
It would lose 18% of its value in just the next six sessions.
AMD simply is a stock that can’t get going and that’s been the case for more than a year now. And while that’s no doubt frustrating for AMD shareholders, the rangebound trading of late isn’t necessarily illogical.
Looking Forward
The most obvious problem for Advanced Micro Devices stock is its valuation. As impressive as recent performance has been, AMD stock certainly isn’t cheap, at least on a headline basis. 2018 consensus still suggests a 31x forward multiple.
EPS growth looks torrid: a reversal from a $0.14 loss last year to a $0.17 profit in 2017, and 100%+ growth likely this year. But thin margins are a factor in the near-term growth. Non-GAAP operating margins have expanded from barely 1% in 2016 to nearly 6% in 2017 to a guided 8% or so this year.
That expansion is going to slow, as AMD itself admits. After Q4, the company reiterated its target of getting EPS over $0.75 – which even at a 20x multiple only gets AMD stock to $15, and over a couple of years.
It’s true that NVDA trades at ~37x 2018 EPS (backing out its cash) – but Nvidia is growing faster than Advanced Micro Devices and has much less exposure to the low-/zero-growth PC space.
As impressive as 2017 performance looks, and as strong as 2018 guidance is, Advanced Micro Devices still needs more. There’s a reason investors are worried about cryptocurrency exposure, even though CEO Lisa Su said on the Q4 call that category drives 6-8% revenue, by the company’s estimates. AMD needs every point of growth it can get.
And it’s still not clear from where that growth really can come. The win at Apple Inc. (NASDAQ:AAPL) is nice, but reflected in 2018 guidance. Datacenter is a great opportunity but AMD still is in third place there, with Intel trying to hold off Nvidia, whose sales in that vertical are rising over 100% year-over-year.
Incremental market share gains in CPUs and GPUs are progress – but, again, this is a stock trading at 31x 2018 EPS. Grinding out growth is enough to keep AMD in the double-digits; it’s not enough to forecast a multi-year run over $20.
Is AMD Stock a Buy?
That’s not to say that Advanced Micro Devices stock is going to decline or that it should be sold short. I like the business here. CEO Su has done a fantastic job of late. AMD is growing sales and expanding margins. There’s a lot of good news here.
But price matters and it’s tough to see $12 as all that compelling. In the semiconductor space, I’d rather own Micron Technology, Inc. (NASDAQ:MU), and I still think NVDA has more upside ahead of it. Should AMD dip below $10 without an earnings miss, I might be interested.
Selling puts in AMD stock, either earning the premium or locking in a cheaper entry point, is another interesting option.
Still, the case here just isn’t compelling enough. AMD is a very different company than it was two years ago. But AMD stock also has risen 500%+. To add to those gains, AMD needs to do even better.
As of this writing, Vince Martin has no positions in any securities mentioned.
