Advanced Micro Devices (NASDAQ:AMD) continues to trade at a triple-digit multiples. The company has seen a tremendous turnaround in the past four years. But after a more than 10-fold increase in the AMD stock price since 2016, is now a good time to buy?
While the company has solid growth prospects, the shares’ current price-earnings ratio of 125.3 makes it priced to perfection. AMD stock faces material downside if any negative risks — say a heat-up in U.S.-China trade war or more competition in CPUs and GPUs — disrupt growth.
Yet, there are a few reasons why Advanced Micro Devices stock is not a screaming buy for investors entering a position today.
Intel’s Launching a CPU Price War
A large part of AMD’s turnaround was the development of a stronger CPU line. With a complacent Intel (NASDAQ:INTC) asleep at the wheel, AMD was able to win back market share with its Ryzen line of processors.
Intel now senses the competitive threat, and is willing to tussle in a price war to fight back against the AMD challenge. In a CPU brawl with the much-larger Intel, replete with deeper pockets to withstand short-term margin declines, AMD has a lot to lose.
But CPUs are not the only place AMD faces competitive challenges. In the GPU space, AMD continues to fight heavy competition from longtime rival Nvidia (NASDAQ:NVDA).
AMD and Nvidia Continue Their GPU Arms Race
July has set up to be a big month in the AMD-Nvidia GPU arms race. The battle for GPU dominance started when AMD announced the launch of its Navi line. Sensing a threat to its market dominance, Nvidia unveiled the “Super” RTX line.
Both tech makers plan to release new graphics cards this month. AMD is set to release the Radeon RX 5700 and Radeon RX 5700 XT on July 7. Nvidia’s RTX 2060 Super, RTX 2070 Super, and RTX 2080 Super hit shelves July 9.
Competing against Nvidia on both price and performance, AMD has its work cut out. If AMD chooses to go the price-war route, operating margins could see declines, tamping the company’s earnings growth.
AMD Stock Price Not Immune to Trade War
AMD has a lot to lose if the U.S.-China trade war escalates. The company has already lost business due to export restrictions that prevent sales to Chinese supercomputer manufacturers. If export restrictions expand to other Chinese end-users, AMD could see material losses in its Chinese business.
The trade war is one area in which AMD has little control over the outcome. Investors need to consider this macro threat, especially with shares trading at such a high valuation. Any negative development will likely hit Advanced Micro Devices stock hard.
AMD Stock Continues to Trade at a Frothy Valuation
High investor expectations continue to keep the AMD stock price at a high valuation. Advanced Micro Devices stock trades at a forward P/E of 30.6x. Compare this to Nvidia trading at 22.8x forward earnings and Intel, trading at 10.8x forward earnings.
AMD’s growth prospects justify the premium to Intel, but not the premium to Nvidia. Both companies have similar growth profiles, but in the past year investors have been more bullish on AMD (AMD shares up 106% from one year ago, compared to a 33% decline for Nvidia).
Either way, both GPU giants are priced to perfection. AMD announces earnings later this month. A weak report could cause material short-term downside. This makes entering a position today less compelling given the priced-in expectations.
Bottom Line on AMD Stock
AMD stock continues to be overvalued and the price has likely peaked. A large part of AMD’s success since 2016 has been regaining market share against Intel. But with Intel announcing a price war to counter AMD’s successful Ryzen processor line, operating margins could take a hit.
Advanced Micro Devices stock continues to trade at a valuation premium to Nvidia, even though NVDA is also fighting back against AMD’s recent success. With Nvidia willing to go the distance to retain their GPU dominance, AMD must continue to bring cheaper and higher-performing GPUs to market.
With a U.S.-China trade war that is far from being resolved, AMD could lose big if the US government accelerates trade restrictions. While the two countries have reached a detente, the trade war is far from over.
The next earnings report (due later this month) is a major short-term catalyst that will hold down the AMD stock price. Investors have minimal upside entering a position today, but if AMD sees any short-term dip post earnings, the stock may be a consideration.
With the pre-holiday early close at $31.19, Advanced Micro Devices stock does not offer a compelling risk/return proposition. For the time being, avoid AMD stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
