Advanced Micro Devices, Inc. (NASDAQ:AMD) has been on an absolute tear from its April lows. It’s been almost three months since we saw those lows, where AMD stock was basing around $9.50 per share.
Luckily, we were buyers around $10. In any regard, AMD has been marching in a straight line higher, rallying from its lows near $9 to its highs near $17.50. The stock almost hit a double and I think with time, it will.
However, some are calling for dramatically higher upside. So far in June, AMD stock has felt the love from analysts. It has an $18 price target from Wells Fargo and a $20 target from Merrill Lynch and Baird. Just rallying to $20 from current levels represents 30% upside.
But there’s also a $21 price target from Cowen and a whopping $27 price target from Rosenblatt Securities analyst Hans Mosesmann. The latter target represents more than 75% upside from current levels and would make AMD nearly a triple from its April lows.
Can it get there?
Valuing AMD Stock
I never understood the criticism that AMD received. Were shares overvalued because they ran from $2 to the teens? Perhaps at that very moment based on current or past results. But not based on the future, which is what matters to investors.
In reality, AMD and Nvidia Corporation (NASDAQ:NVDA) were thriving on a secular wave of graphic chip demand. For the most part, the two companies still are, while Intel Corporation (NASDAQ:INTC) is benefiting from strong chip demand too.
With rising demand comes a spike in revenue, which we had (and again) still have with AMD. The company worked its way from losses, to the black and now to profitability. It tidied up its balance sheet and showed Wall Street it’s ready to play ball.
Are its products as good as Nvidia or its balance sheet as strong as Intel? No, but that doesn’t mean it wasn’t a buy.
For some time now, we’ve advocated for owning all three — INTC, AMD and NVDA. It diversifies the risk and still gives us exposure to a great secular theme.
For what it’s worth, AMD stock now trades at 25 times next year’s earnings. That’s more than Intel’s 12.5 times earnings, but less than Nvidia’s 31 times. On a sales basis, AMD trades at 2.23 times 2018 revenue, cheaper than both Intel and Nvidia at 3.4 and 11.2 times, respectively.
Investors have to evaluate stocks in a relative manner. What stands out above? That AMD stock isn’t as expensive as some may have thought. What else? That NVDA trades at more than 11 times sales. That’s crazy at first glance, but look at the bottom line. It trades at a reasonable earnings valuation and its net margins of ~34.5% are double that of Intel’s.
Trading AMD Stock
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After a run from $9 to $17, AMD stock generally falls into the “no touch” pile for investors. However, this name should be on investors’ radar as a buy-the-dip candidate.
AMD stock was simply overbought earlier this month when it hit its highs. Don’t get me wrong, it was great to see it take out its previous highs near $15.50, where it failed twice before. But it was definitely due for a rest. In some respects, it still is.
I don’t think $14.50 is a bad place for longer term investors to load back up. Admittedly, buying near this level is easier if they were long from sub-$10 and already booked 50%+ gains in just a few months. But this would be my first level to consider repurchasing AMD. My next and more preferred? $13.50-ish.
Should AMD stock fall to this level and find it as support, it will deal a great level of confidence to bulls. That would be the backside of downtrend resistance, a mark that held Advanced Micro in check for more than a year. If it’s now support, it will signal a big bullish change in AMD’s technical setup.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long NVDA.
