In the semiconductor and chip space, Advanced Micro Devices (NASDAQ:AMD) is one of the best stocks to buy. One could argue that among its peers, it’s the best stock to buy. Determining that is the easy part, but timing when to buy AMD stock is not so easy.
We’ll cover why both of those observations are the case with Advanced Micro Devices stock.
Growth Remains the Best
The simple reason AMD stock is a buy? Its growth.
The company is most often compared to Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC), which is no surprise given that they make competing products. While Nvidia has many long-term drivers and secular themes driving its business, it also has a lot of short-term headaches. Mainly, it’s still wading through the crypto-driven inventory glut that’s causing both revenue and earnings pressure.
As a result, Nvidia is forecast to have -8.1% sales “growth” this year and an 18.8% decline in earnings. While AMD was impacted from crypto issues too, it’s been able to maintain decent growth. Analysts expect revenue and earnings to grow 4.6% and 37% this year, respectively.
Worth pointing out is that Intel is also forecast to have negative earnings and revenue growth this year. But despite NVDA and INTC turning in negative growth years, their rebound in calendar 2020 still isn’t forecasted to be as potent as AMD.
|Stock||’19 Rev Growth||’20 Rev Growth||’19 EPS Growth||’20 EPS Growth|
This table above is a good explanation as to why AMD stock is in demand. Simply put, it’s the only one of the three with positive growth in calendar 2019 and that momentum is expected to accelerate in 2020.
Valuing AMD Stock
Of course, valuation always comes into question. While Intel does pay a decent dividend, it’s clear that its growth is simply lagging. The chart above highlights as much. However, that’s reflected in its valuation as well, trading at just 10.5 times this year’s earnings.
Nvidia is well positioned in numerous secular themes and has solid growth with the exception of this year. Thus, shares trade at a more pricey 30-times earnings. AMD though? The stock trades at almost 50 times this year’s earnings. But that doesn’t tell the whole story.
First, high-growth stocks tend to trade at very high multiples. Second, AMD’s fundamentals are improving at an impressive rate. For instance, earnings growth for 2020 is forecast at more than 65%, putting its forward multiple at a much more reasonable 29-times earnings.
Management continues to improve gross margins, significantly bolster net income and deleverage the balance sheet. In other words, the guts of AMD continue to get healthier, which will only make it a more valuable entity once its growth rate inevitably slows.
For instance, long-term debt is down 50% from the end of fiscal 2015 to approximately $1 billion. Current assets and total assets are up 42.5% and 43.6%, respectively, from the end of fiscal 2017. In the same time, current liabilities and total liabilities are up just 19% and 8.2%, respectively. Further, both of the latter two figures are down year-over-year.
Trading Advanced Micro Devices Stock
All you need is a glance at the chart above to realize how volatile the AMD stock price can be. Shares were trading at what is now stout resistance at $34 last September. Not even two months later it was down more than 50%, a few pennies north of $16. The last thing we want to do is step in front of a freight train like that.
Now, it would be an enormous help if we could get some positive trade development or even better, an actual resolution with China. That will cause a frenzy of buying in the chip and memory space, something AMD stock would surely benefit from.
Until then though, we need to be careful.
August has been a tricky month thus far with Advanced Micro Devices stock. Putting in a series of higher lows and lower highs, shares are tightening in a wedge pattern. A break lower could send it to the 38.2% retracement near $28. Below that and the August lows near $27.50 are on the table. Finally, if that fails, the 200-day moving average is next.
If it breaks out over wedged resistance, the 50-day moving day near $31.50 and short-term resistance near $32 is on the table. Above that and resistance at $34 is next in line.
Aggressive investors could go long AMD stock now, while considering reducing or closing the position on a close below either $29 or the 38.2% retracement. More conservative investors may want to wait for either a much larger dip to buy or for AMD to break out of its wedge.