Don’t Buy AMD Stock Until This Happens

AMD stock will likely continue to fall, but not as far as it fell in previous declines

By Will Healy, InvestorPlace Contributor

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Analysts Are Chasing AMD Stock Like the Rest of Us

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After seeing a massive surge during the spring and summer, Advanced Micro Devices (NASDAQ:AMD) stock has again fallen into a downtrend. The Santa Clara, California-based chipmaker has seen its stock fall back in recent weeks as concerns about the valuation of AMD stock take root.

However, AMD has also emerged as a more effective competitor than in previous decades. Today, many view AMD’s chips as superior in many areas. I believe this fact will take AMD stock from large- to mega-cap status in future years.

That said, I believe investors should avoid buying shares of Advanced Micro Devices at these levels. Instead, they should buy AMD stock if it reaches valuations more comparable to its main rivals.

AMD Stock Continues to See Reversals of Fortune

Holders of AMD stock have experienced a strange but prosperous year. It began the year with the rise and fall of cryptocurrencies taking the stock to below $10 per share by April. Soon after, the company stopped considering crypto a revenue source. Both attitudes and sentiments changed quickly soon after.

After losing its crypto niche, the stock moved from undervalued to overpriced in a short period. From April to September, the stock rose from a low of just above $9 per share to a high briefly topping $34 per share by September. Less than a month after reaching that high, the stock has fallen back by more than 20%.

My sentiments have evolved along with the stock price. Back in April, I recommended buying AMD at a level near the 52-week low. Conversely, in September, I encouraged buyers to hold off as the AMD stock price had approached $33 per share.

Now, even with the AMD stock price near $26 per share, my viewpoint remains the same.

AMD Stock Remains Overvalued Despite the Decline

Despite the recent decline, the forward price-earnings (P/E) ratio stands at just under 40. In comparison, Intel (NASDAQ:INTC) trades at just under 11 times forward earnings. Even Nvidia (NASDAQ:NVDA), which arguably has become a more significant rival than Intel, holds a forward multiple of around 30.

Moreover, AMD spent most of its history as an overly hated stock, or one that had become too popular. As a result, the stock fell by more than 90% from 52-week highs twice in the previous decade. Today, it again trades well above its valuation metrics.

As far as I’m concerned, the phrase “it’s different this time” stands as the most alarming phrase one can hear when trading stocks, as it usually means that things are not different. It certainly can fall much further than the approximate 20% decline it has already seen.

If it traded at the same forward multiple as NVDA, it would drop to $20 per share. This would constitute a decline of about 41% from the 52-week high. It could also fall further from there. Catching up with rivals technologically does not insulate AMD stock from fluctuations.

Still, Look to Buy AMD Stock at the Right Price

That said, one thing has become different this time. AMD has become a different company since the 2000s. Instead of existing as “little brother” to its archrivals, it has now emerged as a full-fledged competitor. Today, Intel and Nvidia need to worry about not becoming AMD’s little brother in many respects. As such, I see the odds of another 90%-plus decline as very low.

Over a long-term time horizon, I hold a more bullish position on this stock. AMD remains little brother in one area — its market capitalization. As the company’s chips catch up to Intel and Nvidia regarding sales, I believe it will eventually attain a market cap comparable to these companies.

For now, AMD stock holds a market cap of about $26 billion. Intel stands as a $210 billion company, while Nvidia has grown to a size of around $156 billion. Assuming AMD can maintain its tech edge, I believe it will someday catch up in size.

Final Thoughts on AMD Stock

Although buyers should avoid AMD stock for now, it remains a great play at a lower valuation. AMD rose from its crypto-inspired lows in the spring as competitive strides took AMD stock to a multiple exceeding that of NVDA by the end of the summer. Now, AMD has now returned to a downtrend. Despite the downward moves, AMD stock trades at much higher multiples than Nvidia or Intel.

However, AMD’s market cap remains a small fraction of that of its main rivals. I believe Advanced Micro Devices will someday catch to them in size. which helps justify its lofty valuation to a degree. Due to this possibility, investors should probably look to buy AMD stock once it reaches a more reasonable P/E ratio.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/different-amd-stock-except-different/.

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