Advanced Micro Devices (NASDAQ:AMD) hasn’t just been on a good run in 2019. AMD stock price has been on an upward trajectory since 2015.
Over the past three years, it’s delivered to AMD shareholders an annualized total return of just less than 85% through May 24.
In recent quarters, the demand for semiconductor chips has undergone a cyclical downturn that has impacted AMD’s business and that of many of its peers.
Since AMD stock has come a long way over the past three years, investors naturally are worried that it’s come too far, too fast.
Should investors who own Advanced Micro Devices stock sell it and take their profits? And for those who don’t own AMD stock and missed the significant gains, is now the time to buy AMD stock?
Here are three reasons to buy AMD stock and three reasons to sell AMD stock.
3 Reasons to Buy AMD Stock
Owners of AMD Stock Are Very Loyal: InvestorPlace columnist Nicolas Chahine recently discussed this subject while wondering if AMD stock price would reach $25 or $30. He believes that AMD investors are much more loyal to its stock than the owners of other semiconductor stocks.
“AMD fans have proven themselves strong hands and are less eager to sell out of their positions,” Chahine wrote in a column published on May 21.
“Case in point, the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) got clobbered on Monday [May 20] and fell off a ledge and back to its February contention level. Whereas AMD still is higher than last week’s levels. So even though it too fell on Monday, relatively it is far out-performing the rest of the gang,” he added.
When you’re in the middle of a cyclical downturn,, it helps to have strong hands.
AMD Has an Excellent CEO: There is no doubt that Lisa Su has made a big difference to Advanced Micro Devices since she became CEO. Since October 2014, AMD stock has surged 669% compared to a 57% gain for the SPDR S&P 500 ETF (NYSEARCA:SPY).
AMD stock price wouldn’t have risen nearly as much if Su hadn’t formulated a strategy that could take AMD’s business to the next level.
“Under her supervision, AMD jumped ahead of Intel in making CPUs at smaller node sizes, giving its products an edge in speed and performance,” commented Investor’s Business Daily contributor Patrick Seitz in a column published on May 23. “AMD is now making chips at 7-nanometer scale, while Intel has struggled to make chips at 10-nanometer scale.”
Gaining Market Share: By managing to deliver smaller chips that are faster and more efficient than those of its competitors, AMD is expected to take market share from them.
Recently, it was announced that AMD and Cray (NASDAQ:CRAY), which was recently acquired by Hewlett Packard Enterprise (NYSE:HPE) for $1.3 billion, are partnering to build Frontier, the world’s fastest supercomputer.
The $600-million contract from the Dept. of Energy to build this supercomputer won’t make a big difference to AMD’s overall revenue, but it will make a statement about the company’s ability to deliver reliable products.
That statement is a priceless, positive catalyst for AMD stock price.
3 Reasons to Sell AMD Stock
Its Growth Is Slowing: AMD announced its first-quarter results on Apr. 30. For the first time in three years, AMD reported a year-over-year decline in revenues, and for the first time in seven quarters, its earnings fell year-over-year.
Although it did beat analyst estimates on both the top and bottom line, its revenues fell 23% in Q1 to $1.27 billion from $1.65 billion a year earlier. On the bottom line, its earnings fell 45% to 6 cents from 11 cents a year earlier.
While AMD’s gross margins improved in Q1, investors ought to be cautious about the company’s optimistic outlook for the second half of 2019. AMD has predicted that its top and bottom lines will resume growing in the second half. If the trade war continues well into the fall, AMD won’t meet its target, putting downward pressure on AMD stock price.
The Valuation of AMD Stock Is High: Advanced Micro Devices stock currently trades at 43 times analysts’ consensus 2019 earnings per share estimate of $0.65. The P/E ratio of AMD stock is higher than that of both Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). And you can get the entire VanEck portfolio of semiconductor stocks for 17 times their expected earnings.
As Chahine suggested, it would be wise for investors to buy the ETF instead of ratcheting up their company-specific risk by owning Advanced Micro Devices stock.
AMD’s Peers Are Better: Nvidia reported its earnings on May 16, and its revenues and profits were higher than expected. More importantly, Nvidia raised its guidance, suggesting that it will do even better this quarter.
Although AMD has said virtually the same thing about the remainder of the year, the fact that NVDA stock is trading at just 28 times analysts’ average forward earnings estimate, 35% cheaper than Advanced Micro Devices stock, is an indication of just how expensive AMD is at the moment.
If you own AMD stock, taking profits wouldn’t be the worst thing to do at this point.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.