So far in 2019, investors in Advanced Micro Devices (NASDAQ:AMD) have nearly doubled their money. AMD stock that began the year at $18 each is due to open this morning at $33 and change.
But it’s hard to justify this based on financial results. The company is due to report its second quarter this afternoon. Earnings of 8 cents per share are expected on revenue of $1.52 billion. Optimists are hoping for 9 cents.
That sounds good. AMD had revenue of just $1.272 billion in the March quarter but had sales of $1.756 billion during the June quarter last year. An industry-wide chip slump has hurt everyone, and AMD is coming out of it faster than most. But the balance sheet remains smaller, with cash of $978 million at the end of March.
AMD is still a small company, when compared to the space. Yet its market share is nearly $37 billion.
Bottom Rail on Top
Advanced Micro Devices stock has zoomed on a growing realization that the long-term relationship between AMD and rival Intel (NASDAQ:INTC) in microprocessors has reversed. The shares are up almost 85% year-t0-date, while INTC stock has only managed to gain 11.9%.
AMD used to ride in the wake of Intel as the low-price leader. Now it’s AMD Ryzen chips that are being written about as the premium product, Intel’s as the low-cost alternative. The chipmaker continues to push out new product and increase its market share against Intel. Its first quarter share of 31.8% is the best performance in over a decade.
Meanwhile, AMD’s reputation has grown worldwide, and it’s now gaining market share in markets like Japan and Germany, especially in direct sales. AMD is threatening Intel’s long-time global lead in this segment, and if that falls can the pre-built market be far behind?
The traditional relationship remains in graphics, where Nvidia (NASDAQ:NVDA) GeForce is seen as superior to AMD’s Radeon line. But graphics growth is strong, not just in gaming but in data centers that need to support artificial intelligence.
Time to Sell?
Despite this strong performance, there are bears who suspect it’s time to sell.
Expectations for the quarter are high and the AMD share price is now expensive. Investors are paying over five times revenue for AMD, and a whopping 136 times earnings for a stock that has never paid a dividend.
AMD’s small size still lets it leverage growth against Intel, whose performance trails that of the average Nasdaq stock over the last five years. AMD, meanwhile, was a $2 stock as recently as 2016. It’s like the San Antonio Spurs or the Green Bay Packers, a small market sports dynasty it’s foolish to bet against.
AMD even looks good against Nvidia, which leads in graphics chips but must deal with booms like bitcoin mining and the end of that boom. Nvidia still dominates in the add-in graphics card market gamers look at. But AMD’s broader product line has let its stock ride out the slump better than Nvidia. NVDA stock is down 36% since the market peaked last September, while AMD stock is up 13%.
Bottom Line on Advanced Micro Devices Stock
It’s hard to bet against Advanced Micro Devices Inc. stock but its valuation has become difficult to justify.
AMD continues to gain share against Intel, which seems powerless to halt the trend. But continuing gains are now built into its stock price. Like that small market sports powerhouse, it’s not sneaking up on people anymore.
Analysts have been backing off their support for AMD stock in recent months, the average rating now a hold instead of overweight.
Optimistic analysts see AMD growing revenue in the high-teens, year over year. At the stock’s current price that’s not good enough for me. Now might be a good time to take profits and wait for a better entry point.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.