When Advanced Micro Devices, Inc. (NASDAQ:AMD) flew to the moon at a share price in the range of $30 to $34 back in September, the markets expected so much from the chip maker. But after the company issued its third-quarter results on Oct. 24, the stock corrected badly.

The good news is that for the last few weeks, the stock trended upward. Investors do not have to wait very long until the next earnings report sometime around Jan. 23, 2019.

At a forward P/E north of 30 times and lowered expectations ahead, should technology investors consider AMD stock once again?

AMD’s Weak Growth Last Quarter

Advanced Micro Devices reported respectable third-quarter earnings of 13 cents, beating consensus estimates by a penny. Revenue rose 4.4% from last year to $1.65 billion. Compared to its price-earnings multiple, the revenue growth is underwhelming. Investors expected growth in the double-digit range at the very least. That the stock price is holding up suggests shareholders are willing to give AMD another chance.

AMD’s competitor in the graphics card space (GPU) failed to keep up its sales momentum. Nvidia (NASDAQ:NVDA) said that it has around 12 weeks of inventory to clear.

With retail channels stuck with the older 1080 GTX-level cards, AMD has a chance of promoting Vega 56 and 64 to take market share. It also refreshed the RX 580 with the Radeon RX 590 Crossfire. This combo is a viable competitor to Nvidia’s RTX 2080.

GPU Still a Headwind for AMD Stock

Unfortunately, benchmark tests at 1080p show that the RX 590 8GB solution falls short compared to Nvidia’s RTX 2070. It even falls behind the last-generation GeForce GTX 1070. The power consumption of AMD’s dual-card solution is off the charts. The Crysis 3 game consumes 576 Watts, compared to 498 Watts for the Nvidia RTX 2080 Ti and 378 Watts for the RTX 2080.

It might be that game software development for a machine powered by two AMD cards is behind, leading to the underperformance. And for now, AMD will need to rely on selling the Vega 64 to gamers demanding high-end machines.

7-nanometer Chips

Fortunately, AMD has a supply agreement with Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) for producing 7-nanometer chips. AMD said that it is on track to launch 7-nanometer datacenter GPU in the current quarter.

Already, customers have a strong interest in the product because of the performance and differentiated feature set. AMD secured multiple datacenters wins already. Expect some revenues booked in the fourth quarter as AMD ships the hardware in that period.

In the coming quarters, AMD will transition to the next generation of high-performance products powered by 7-nanometer x86 CPUs.

In 2019, AMD will ship the second generation EPYC, which is a 7-nanometer CPU. The broad array of refreshed products in the coming year are clear revenue drivers. Despite the promising outlook, shareholders of Intel (NASDAQ:INTC) are not giving up. Whether investors like Intel’s low valuation of 11 times earnings or its modest dividend yielding 2.54% is not clear. And while INTC stock holds up, AMD’s stock could perform better in 2019 if revenues grow at a faster pace.

Valuation

Based on the 24 analysts covering AMD stock, the average price target is around $26 share. Tipranks noted that AMD earned another “buy” rating about one week ago from Gus Richard of Northland Securities. Indeed, investors must willingly pay an EV/forward EBITDA of over 25 times to justify the current stock price level. Per finbox.io, AMD valuations should trade above that of Nvidia and Intel given the strong growth prospects of the CPU in notebooks, desktops and the enterprise server market.

Source: finbox.io

Putting this all together, the implied fair value for AMD is in the range of $14.75 to $24.81.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.