Advanced Micro Devices (NASDAQ:AMD) is one of the big stories in the semiconductor space. Up more than 70% year-to-date, AMD stock is outpacing the widely followed iShares PHLX Semiconductor ETF (NASDAQ:SOXX) by a margin of better than 2-to-1.
In fact, it’s reasonable to call AMD stock a strong stock in a weak place. A weak place because chip stocks have been battered by the U.S.-China trade war. The PHLX Semiconductor Sector Index finished August regaining a bit but still ended the month at a loss while AMD shares were up more than 5%.
AMD stock is undoubtedly on an impressive run this year and the shares aren’t cheap. They trade at 49.5x forward earnings and at 17.6x book value. That probably doesn’t qualify as growth at a reasonable price and makes AMD look richly valued relative to some marquee competitors.
For example, Nvidia (NASDAQ:NVDA) isn’t cheap at more than 33x forward earnings and more than 10x book value, but those numbers practically scream “cheap” relative to AMD stock.
Despite the massive 2019 run-up and valuation considerations, some investors remain bullish on AMD stock. Eagle Point Global Management’s Keith Hwang recently said the shares could ascend to $64 over the next 12 to 24 months. That’s more than double where the stock opens as investors return from the three-day holiday weekend. Part of that bull thesis is based on AMD having a head start on rival Intel (NASDAQ:INTC) in some core markets, such as new generation cloud servers.
“How does this disruption in the server ecosystem translate into earnings power? We can look back to 2005 when AMD was extremely competitive in the server space,” wrote Hwang. “AMD had launched dual-core Opterons, featuring a new class of performance that had never been possible in the past. AMD also had a six-month head start on Intel’s dual-core Xeons. Today is eerily similar to 2005, but now Intel is likely two years behind on architecture, and serious doubts exist over whether Intel will ever be competitive again with a leading-edge process node.”
Calling On Catalysts
When a stock is already up 70% in eight months and some investors think it can almost double in two years or less, as is the case with AMD stock, catalysts are obviously needed. There are some available with AMD, although investors must note this is not a wide moat name as the company deals with several more than capable competitors.
“AMD’s semicustom processors have been included in the Microsoft Xbox One and Sony PlayStation 4 game consoles,” wrote Morningstar sector strategist Abhinav Davuluri in a recent note. “AMD has also sought to re-establish itself in the server market, reaching mid-single-digit unit share exiting 2018. In 2019, AMD has key product launches including new client CPUs, EPYC server CPUs, and Radeon data center GPUs.”
Words of caution: any of its rivals can encroach on AMD’s markets — Intel and Nvidia already do — and AMD simply isn’t as financially sturdy as some of its chip competitors. It’s actually cash flow negative. This late in the business cycle, investors are prizing quality companies with strong balance sheets. I’m not saying AMD is a financial wreck, but if you’re an investor looking for looking for strong balance sheets in technology, there are a plenty of other considerations beyond AMD stock.
Bottom Line on AMD Stock
There’s growth to be had with AMD stock. “The cyclical nature of the semiconductor industry, coupled with AMD’s weaker competitive positioning, makes AMD an inherently risky investment despite recent product launches that are on a more level playing field,” said Morningstar.
The company could easily deliver revenue growth 12% on a compound annual growth rate basis through 2023. However, the shares look close to fairly valued here and expecting them to double, even over 24 months, maybe asking a bit much. Additionally, AMD stock is one in the semiconductor space that probably isn’t appropriate for risk-averse investors.
Todd Shriber does not own any of the aforementioned securities.
