At one point Wednesday, shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) were up 9%. While AMD stock only ended the day with gains of 4.1%, it was still a respectable gain. So, what happened?
Apparently M&A rumors are back.
Word on the Street is that someone is looking to buy Advanced Micro Devices. But who?
It obviously wouldn’t be Nvidia Corporation (NASDAQ:NVDA) and likely not Intel Corporation (NASDAQ:INTC) either. It would be pretty hard for either of those names to scoop up AMD and pass the necessary regulatory hurdles to close the deal.
In short, it could be just about any small- to medium-sized tech company looking to expand its business and buy some growth. Particularly after the latest tax reforms gave a boost to many companies’ bottom line.
With AMD currently sporting an $11.8 billion market cap, a deal would have to come at a premium. Would AMD want to sell? It has come a long way in just a few years — trading at less than $2 in early 2016. But at the same time, management has really turned AMD into an impressive independent company.
Fundamentals of AMD
The bears do not like AMD stock. If they’re bullish on the sector, they may like Intel for its low valuation or Nvidia for its robust business. But Advanced Micro Devices is not attractive to them, based on its fundamentals. Maybe they should reconsider their view, though.
The company continues to grow sales at a double-digit pace, while earnings are finally entering positive territory. Last quarter, earnings of 8 cents per share came in 3 cents per share ahead of estimates. Sales grew 33% year-over-year to $1.48 billion, also beating expectations. Even better, first-quarter guidance was strong.
For the year, analysts are looking for earnings per share of 38 cents, more than double the 17 cents per share from 2017. In 2019, estimates increase to 53 cents per share. This growth outpaces the expectations for revenue, which currently calls for 18% and 8% growth this year and next, respectively. That’s good for margins.
Speaking of which, profit margins and operating margins are now above water, which is great news for AMD. The company is also generating positive operating cash flow, although, on a trailing twelve-month basis, Advanced Micro Devices still has a small deficit for free-cash flow. In 2018, it would be great to see operating cash flow continue higher and for the company to be free-cash-flow positive. Given that both of these metrics have been surging higher over the past few quarters, though, that shouldn’t be a problem.
Hope as the bears might, the fundamentals for AMD are improving, not worsening.
Trading AMD Stock
With profitability on the table, we can now value AMD stock like we value other names in the space. It trades at 31 times this year’s earnings and 22 times next year’s estimates. For reference, NVDA stock trades at 38 times this year’s earnings and 33 times 2019 estimates. On an earnings basis, Intel is the cheapest of all three. However, analysts only expect earnings growth of 2.6% this year and 7% next year. Further, they only estimate for ~3.7% sales growth for both years.
Further, AMD stock trades at just 1.8 times 2018 sales, vastly cheaper than NVDA at 11.8 times sales. INTC stock trades at 3.7 times this year’s sales estimate. So, on that front, AMD stock is actually somewhat cheap, something the bears may not like to admit now that the bottom line is improving.
Obviously the fundamental and valuation situations continue to improve. What do the charts say, though?
Click to Enlarge
There is strong support down near $10. Resistance can be found at both $15 (black line) and sloping lower (blue line) in the mid-$13 range.
How do we trade it?
AMD stock continues to chop between $11 and $13. My thinking is that it will eventually push through that downtrend of resistance and eventually retest $15. If it falls to $10, investors would be wise to buy.
Investors who don’t want to wait for $10 could buy some now and add on a decline.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
