Did you buy Advanced Micro Devices (NASDAQ:AMD) stock at the end of 2018 and are you still holding it? Kudos for believing in CEO Lisa Su’s ongoing transformation of the once-struggling semiconductor company.
As a result of Su’s work to revitalize the company since taking the top job in October 2014, she has managed to bring AMD back from the brink in less than three years. Now, as it moves to take more market share, analysts generally like what it’s doing despite the slowdown across the semiconductor industry.
Currently, 13 analysts have an overweight or buy rating on Advanced Micro Devices stock with 16 holds and just four underweights or sell ratings despite the 76% run-up in the AMD stock price. By comparison, 25 analysts give Nvidia (NASDAQ:NVDA) a buy or overweight rating with nine a hold and just three an underweight or sell rating.
So, 68% of analysts give Nvidia a rating of overweight or better, while only 39% do the same for AMD stock.
I believe the key difference between the two companies, one that I’m sure is a big difference-maker for analysts, is the fact that Nvidia continues to generate significant free cash flow despite the slowdown in its business, while AMD doesn’t despite improving its product offerings.
Cash flow is king goes the saying.
However, I think it is safe to say that once industry conditions improve in 2020, a majority of those 16 holds on AMD stock could turn to buys because analysts generally view Advanced Micro Devices in a favorable light.
Up 76% year-to-date, if you haven’t bought Advanced Micro Devices stock, you probably think it’s too late to jump on the bandwagon.
Here’s one reason you’d be right and one why you’d be wrong.
Why It’s Too Late to Buy AMD Stock
AMD announces earnings July 30 after the markets close. Given the huge run, it has been on in 2019, it needs to deliver a positive surprise in the second quarter. Analysts are expecting $1.52 billion on the top line and 8 cents on the bottom.
As my InvestorPlace colleague, Laura Hoy, pointed out recently, much of the optimism for the company is already baked into the AMD stock price. Currently trading at almost 6X sales and 50X its forward earnings, anything less than a home run from earnings and it’s unlikely that AMD stock will go much higher than $33 … where it’s currently trading.
However, if it misses on any of the key numbers, it’s sure to move back into the $20’s, which could provide patient investors with an excellent entry point.
The easy pickings have already been taken.
Why It’s Not Too Late
InvestorPlace’s Brett Kenwell wondered July 19 if AMD could break out to $37. He makes the argument that if the company can meet analyst growth estimates, its current valuation isn’t all that outrageous.
Interestingly, Kenwell also pointed out the Mizuho analyst cut AMD’s rating to “neutral” from “buy,” but raised the target price by four dollars to $37. With the average analyst estimate $43, about 30% above current prices, the upside potential is still pretty good despite the significant gains through mid-July.
The reality is that AMD is a much stronger company than it was four years ago, even a year ago, and that means it should be able to do a better job fending off its larger competitors such as Nvidia and Intel (NASDAQ:INTC).
As its stock continues to test its $34 resistance, eventually investors are going to push through that level. A good time could be right after it delivers a positive surprise on July 30.
The Bottom Line on Advanced Micro Devices Stock
When it comes to AMD versus Nvidia, I prefer to go with the latter because it’s a free cash flow generator.
However, Advanced Micro Devices stock has a much better year going than Nvidia when it comes to quarterly results. I expect that to continue to be the case in the second quarter and perhaps the third and fourth as well.
But it has to deliver the goods when it reports. A negative surprise will be a definite momentum killer.
Should you buy AMD stock before earnings?
I’d consider a small position and then wait to see what happens July 30. If you can get it below $30, that would be ideal.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
