In its latest move higher, Advanced Micro Devices (NASDAQ:AMD) stock surged in Monday trading following a new product release. The Santa Clara, California based manufacturer of semiconductors spent most of its history as the alternative chipmaker for PCs. Now, after almost a half-century of existence, AMD stock may finally achieve its renaissance.
Today, new management and an increased demand for chips from other sectors have led to a new role for the company as an industry leader. However, Wall Street recognized this, and the price of AMD stock has swelled over the summer. Given this run-up, investors might be asking themselves the question: Is AMD stock a buy right now?
Investors should approach the stock with both optimism and caution.
New Graphics Card Boosts AMD Stock
Stock in Advanced Micro Devices rose by 5.3% after the release of a new graphics chip. AMD designed this Radeon Pro V340 graphics card for desktop-as-a-service, CAD and design applications. It can run more 1G virtual machines than the Tesla P40 made by Nvidia (NASDAQ:NVDA), among other benefits.
This and other advances have changed the image of the company. Advanced Micro Devices spent decades as the perennial second-place company. It played the consistent role as the lower-priced, lower quality alternative to Intel (NASDAQ:INTC) during the PC era. More recently, it came out of nowhere to claim second place regarding graphics chips, right behind Nvidia.
Stop Thinking of Advanced Micro Devices as Second Place
However, the decades of playing second fiddle in the chip industry may finally end. AMD has moved beyond a niche player to become a market leader in its own right. Around the new year when crypto heated up following the meteoric rise of bitcoin, AMD’s lower-cost chips became the favorite for cryptocurrency mining. Interest in crypto-mining waned, and AMD stock temporarily fell as a result. Still, this status gave the company a reputational boost and made the public think of AMD as a first-place company.
As seen with the latest Radeon Pro V340 release, similar improvements have come to other applications. Consequently, Wall Street has rewarded Advanced Micro Devices stock handsomely. I recommended this stock in early April, mostly because of its massive profit growth. However, the growth seen in the last four-and-a-half months exceeded even my expectations. Since early April, stock in AMD has risen from just over $9-per-share to over $25-per-share today.
Why AMD Investors Require Extreme Caution Now
While that stands as one of the larger run-ups of a major stock recently, I now urge AMD investors to be cautious. The forward price-to-earnings ratio, which was below 23 when I recommended the stock, has risen to about 55. With 37% growth predicted for next year, AMD stock now appears overbought.
Investors should also note that Advanced Micro Devices’ stock rose by over 15-fold from its 2015 lows. This now exceeds NVDA’s rate of increase over the same period.
Still, while I will not fault investors who bought before April for taking some profits, I will not say that AMD stock is a sell. In fact, I believe Advanced Micro has further to run over the long-term. If the stock falls more than 20% from its high, I would encourage more buying.
I say this because I like what has happened with Advanced Micro Devices stock and the company in general. Under CEO Lisa Su’s leadership, the company outlined a strategy for long-term growth revolving around high-performance chips and graphics technologies. As a result, Advanced Micro has gone from near bankruptcy to top competitor in the semiconductor industry. Now with the AI, VR, data center and crypto applications, I see a very bright future for Advance Micro Devices’ stock.
The Bottom Line on AMD
AMD is shedding its image as the second-place chip company, but with the move higher in AMD stock, investors should take a more cautious position on the equity. Monday’s surge represents the latest step higher in the meteoric rise of AMD stock. With Advanced Micro’s move from follower to leader in the chip industry, stockholders have seen handsome rewards in a short period.
However, this has taken the stock’s P/E ratio to high levels. With this run-up, I would now urge buyers not to buy more at these levels. Still, investors should see Advanced Micro Devices’ stock as a legitimate contender in its industry.
For this reason, investors should buy AMD stock whenever it pulls back. While the stock could stagnate in the near-term, I think the future of AMD has never looked brighter.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
