Advanced Micro Devices (NASDAQ:AMD) stock trades in a no man’s land. The equity made a dramatic and deserved comeback under CEO Lisa Su. Now it holds a market lead over Intel (NASDAQ:INTC) and has become a competitive threat to rival Nvidia (NASDAQ:NVDA).
However, headwinds from within the company and the macro economy could mean that AMD stock will struggle to gain traction for the foreseeable future.
The $34 Ceiling Holds
Few can deny the dramatic turnaround AMD stock has made under Lisa Su. She has taken AMD from a company struggling for survival to one that has leaped ahead of archrival Intel by years. The company’s 7nm Rome processor launched on August 7 amid an environment where Intel struggles to release a 10nm Xeon processor.
The biggest problem I see for Advanced Micro Devices stock is the one I mentioned before earnings—the $34 per share price ceiling. Earnings of 8 cents per share saw the company meet estimates on a non-GAAP basis. From a GAAP standpoint, earnings of 3 cents per share actually fell short of expectations by a penny per share. Quarterly revenues of $1.53 billion beat estimates by a relatively modest $10 million.
Due to this lackluster report, the $34 per share price ceiling held firm. The AMD stock price fell below $28 per share by August 5. Three days later, news that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would use AMD processors for Google Cloud quickly sent it back to the $34 price ceiling. Unfortunately for bulls, that limit held again, and now, Advanced Micro Devices stock trades at under $32 per share.
From a fundamental standpoint, Advanced Micro’s inability to go to $35 per share and beyond seems hard to understand. AMD stock currently trades at a forward price-earnings (PE) ratio of around 29. While not cheap from an S&P 500 standpoint, it seems a little low for a semiconductor stock at the top of its game.
Investors might recall that Nvidia traded at over 50-times earnings before the fall 2018 stock selloff. Moreover, Wall Street estimates profit growth of 37% for the current fiscal year and 68.3% the next. Investors have often paid much higher multiples for lower growth.
AMD Faces Internal and Macro Headwinds
Still, despite AMD stock appearing inexpensive, I would wait until the $34 price ceiling breaks before buying it. For one, some have cast doubts that AMD’s Ryzen chip works as fast as advertised. Despite this news, AMD still maintains a wide lead over Intel. However, this may also indicate that AMD has some work to do on this chip. Such news could dampen confidence in Advanced Micro Devices stock.
Moreover, AMD stock could also become the victim of macro headwinds. AMD first achieved its multi-year high of around $34 per share in September 2018. During last year’s fall season, the selloff wiped out more than half of its value before the recovery earlier this year.
Now, the yield curve has inverted, indicating that a recession may come soon. I do not think this changes the long-term bull thesis on AMD. However, it could lower revenues in the near term. Also, in such an environment, investors tend to show a lower tolerance for high multiples.
Furthermore, the continuing trade war with China creates further concerns. As Faisal Humayan points out, China accounts for about 30% of AMD’s business. This places in doubt the company’s ability to do business with Chinese tech giant Huawei. For now, the Trump administration has lifted restrictions. However, it should surprise nobody if this Huawei ban gets reinstated.
The Bottom Line on AMD Stock
Though AMD will remain a force in the semi industry, investors should avoid Advanced Micro Devices stock for now. Usually, I would encourage investors to buy an equity in AMD’s position. A forward PE of 29 and profit growth north of 30% typically seems like a reasonable bet. Moreover, its lead over arch-nemesis Intel should bode well for the company.
However, the inability of AMD stock to stay above $34 per share limits the potential for near-term gains. Furthermore, lower-than-advertised speeds for the Rome processor could put pressure on shares as the company addresses this issue. Finally, macroeconomic conditions such as a possible recession and an extended trade war could dull the appetite for equities across the board.
AMD is a long-term winner, and the $34 per share price ceiling cannot hold forever mathematically. However, as long as it remains intact, AMD stock is only a buy at a significantly lower or higher price.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.