As I have recently written, Advanced Micro Devices (NASDAQ:AMD) stock has been on a tear in the past few years. AMD stock price is up more than 600% since 2016. There are plenty of fundamental justifications for the move, but that doesn’t mean the stock is a buy.
Piper Jaffray analyst Harsh Kumar initiated coverage of Advanced Micro Devices stock this week with a “neutral” rating. Kumar made a similar argument I made in June about why investors should stay away from AMD stock.
AMD Stock Priced For Perfection
AMD has accomplished a lot of things in the past several years. It’s EPYC, Ryzen and Radeon product launches have been tremendous successes. It’s even gaining meaningful market share from Intel (NASDAQ:INTC). Unfortunately, all these developments and all of the near-term catalysts for AMD stock are already priced in.
“We view the company’s product positioning and financial leverage favorably, but given the stock’s recent appreciation (+69% YTD vs. SOX +28% YTD) and the current macro/geopolitical environment, we see the stock as more or less fully valued,” Kumar says.
AMD launched its EPYC Rome 7nm chips in August. The first Rome numbers will be reported in the third-quarter. But with the stock up another 78% year-to-date, it’s hard to argue that catalyst isn’t already priced in. More market share gains from Intel are likely also priced in. That doesn’t mean those developments aren’t bullish for AMD as a company. It just means they likely won’t move the stock significantly higher for at least another couple of quarters.
“With the recent ROME announcement, we see the products’ optimism fully priced-in as we move into the second half of the year,” Kumar says.
Advanced Micro Devices Stock Has Too Many Risks
The single-biggest risk to AMD stock is its valuation. AMD shares trade at a forward earnings multiple approaching 30. It’s not outlandishly high, but there’s likely not much room for expansion. That multiple is assuming AMD hits all its growth targets and impresses with its Rome chips. It also assumes Intel continues to drop the ball and hand over business to AMD.
AMD shares trade at a PEG ratio of 4.5 and a price-to-sales ratio of 5.6. Given the external risks AMD is facing, that’s a pretty full valuation.
The single biggest near-term threat to Advanced Micro Devices stock is the U.S. trade war with China. AMD revenue was down 13% last quarter. The company said the trade war will likely weigh on numbers in the second half of 2019. About 30% of AMD’s revenue comes from China.
U.S. President Donald Trump has shown no intention of backing down on the trade war. Even if AMD is not directly targeted by China, any slowdown in China’s economy could hurt AMD’s business and share price.
Finally, as I have said before, AMD beating Intel to the punch by launching its 7nm node products while Intel struggles with 10nm node launch is a bit of a David versus Goliath story. Sports fans know there can be some major upsets when the stars properly align on a particular day. But investors can’t expect the underdog to keep winning every game. Intel has superior scale and resources. AMD’s window of opportunity is closing fast. Whenever Intel finally gets its act together, it will come back with a vengeance.
AMD Stock Investors Should Be Patient
In a nutshell, AMD has been one of the most impressive companies and stocks on Wall Street in the past few years. Everything it has touched has turned to gold. Shareholders have been rewarded for this Midas touch. But at this point, expectations are too high and risks are too plentiful to be buying the stock at nearly 30x forward earnings.
AMD has always been a volatile stock. Investors can expect more of the same volatility in coming months even if the fundamental picture for the company doesn’t shift much.
As Kumar pointed out, AMD stock has dipped below a forward PE of 30x several times in the past two years. Even if you are a long-term bull, there will likely be a better opportunity to buy the stock at some point in the next year. The long-term bullish catalysts for AMD stock will play out over a period of years, not months. I would recommend staying on the sidelines for now and watching for the next 10% to 20% pullback in AMD stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
