It has easily been one of the year’s top-performing names. Advanced Micro Devices (NASDAQ:AMD) has more than doubled since reaching a low near $16. It’s going strong too, with AMD stock testing the waters of multi-year highs just this week. The bulls continue to charge.
The sentiment is certainly understandable. The turnaround effort CEO Lisa Su led when she took the helm worked. Revenue growth pushed the company back into the black last year. The company is expected to report a profit of 65 cents per share this year, and reach earnings of $1.03 per share in 2020.
That expected progress for the foreseeable future, however, doesn’t inherently mean the AMD stock price will rise in conjunction with those results. Analysts still contend Advanced Micro Devices stock already fully reflects a bright future.
AMD Stock Graduates from “Turnaround Story”
There’s no denying AMD is back from the dead. Pushed around by Nvidia (NASDAQ:NVDA) within the GPU market and pressured by CPU giant Intel (NASDAQ:INTC), as of 2015, the company appeared to be on its last leg.
Clearly it wasn’t.
Investors who bet on a rebound have been handsomely rewarded too. AMD stock went up significantly since early 2016, when the company began unveiling new graphics cards and the crypto-mining craze was at full stride.
The underpinnings for those bullish bets have changed in the meantime, though most investors have yet to make the mental adjustment. They continue to see AMD as a turnaround in progress. The turnaround is largely complete.
The market is willing to tolerate outrageous valuations in anticipation of future profits, even if those profits are years down the road. More normalized earnings are now in view, undermining the turnaround thesis. Advanced Micro Devices stock is, for all intents and purposes, another tech stock.
The projected results and corresponding valuations serve as a partial warning.
Working its way out of the red provided plenty of bullish fodder, as the swing to profitability made for dramatic headlines. The bar is rapidly being raised, however, by ever-growing comparisons.
The 2021 net income outlook of $1.5 billion is double that of this year’s earnings projection, but at 15% of that year’s expected — and plausible — revenue of $9.54 billion, margins are nearing their maximum potential. And, with a market cap of $36.9 billion, AMD stock is still valued richly at more than 24 times expected income two years down the road.
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Revenue-oriented valuations are also near the end of their normalization journey. The company is priced at 5.4 times this year’s sales outlook, and 3.9 times 2021’s expected top line.
Both are typical measures, as Advanced Micro Devices puts the finishing touches on its turnaround.
Analysts see it too.
While the pros were willing to maintain price targets well ahead of the then-current AMD stock price in 2018, since the latter part of that year they have been nowhere near as willing to stick their necks out. For the second time in less than a year, AMD stock is above its consensus target.
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Mizuho Securities analyst Vijay Rakesh was the most recent to join the “take profits” fray.
No analysts have any problem with the direction the company is moving. They just simply, as a group, feel all the current and future upside is already reflected in the stock’s price.
In short, the turnaround honeymoon is over. Going forward, AMD is going to be viewed as a more established entity and given less leeway.
AMD Stock Looking Ahead
The saga will take a significant leap forward next week when Advanced Micro Devices is slated to report its second quarter numbers. Analysts are looking for income of eight cents per share on revenue of $1.53 billion. Both figures are down significantly from year-earlier levels. The stage may be set for an earnings beat.
A beat means less and less, though. In the absence of guidance that makes it clear analysts are underestimating revenue and earnings growth well into the future, Tuesday’s earnings report could readily turn into a ‘sell the news’ event.
AMD stock has rallied to its September peak near $34 a handful of times since June, but has yet to move past it. It may be a sign that subconsciously, perhaps unconsciously, investors are quietly starting to realize the bulk turnaround gains have already been reaped.
The fact that AMD is starting to cut prices as a means of competing with new wares from Nvidia as it enters a price war with Intel at the same time only bolsters the argument that AMD stock has peaked.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
