I last wrote about Advanced Micro Devices (NASDAQ:AMD) stock back on Aug. 22. At the time, I suggested AMD stock buyers wait for a better entry point. Since then, AMD stock price is down 3.2%, but I still believe investors should be patient.
I get it. I’ve read everything the Advanced Micro Devices stock bulls have to say about the company’s outlook. Yes, there are reasons to believe the company’s recent earnings hiccups are only temporary. Yes, AMD is exposed to some powerful secular growth trends, and AMD’s new Ryzen, EPYC and Radeon processors should be hot sellers in the second half of the year.
But I still thought AMD stock was a bit too expensive back in August. Some recent market developments make me even more concerned today.
The Good News About AMD Stock
There are plenty of things to like about AMD stock. Its latest generation of processors has been a tremendous success. Its newest products, EPYC Rome 7 nm chips, were released just last month. Early reviews have been positive, and the numbers won’t be reflected until the third-quarter earnings report.
CFRA analyst Angelo Zino is optimistic about AMD’s near-term outlook from a business perspective.
“Despite lower than expected Q3 guidance, which we partly attribute to game console softness, we expect AMD’s 7nm Ryzen processors and Radeon GPUs to sell very well this holiday season,” Zino says.
He’s also optimistic about AMD’s ability to continue to gain market share from Intel (NASDAQ: INTC).
“We anticipate strong market share gains over the next 12 months on the data center server side, supported by a significantly faster ramp of 7 nm processors,” he says.
But before investors get too excited about such bullish commentary, there is a caveat. Despite hit new products, an improved outlook and significant market share opportunities, CFRA rates AMD a “hold.”
Zino’s beef with Advanced Micro Devices stock is the very same one I discussed last month: “full valuation.”
AMD Stock Downside Risk
AMD’s forward PE is 28.6. That’s not obscenely high, but it doesn’t leave much room for expansion. Let’s face it, AMD is up 410% in the past three years. Much of its present and future success is already priced into the stock. Investors expect big things out of the Rome chips, and they already expect AMD to steal share from Intel.
The trade war is also a big risk for Advanced Micro Devices stock in the near-term. While tensions seemed to have cooled a bit between the U.S. and China in recent weeks, a trade deal does not appear to be imminent.
Traders who have followed negotiations closely know there have been several breakdowns in trade talks up to this point. AMD generates about 30% of its revenue from China. Another trade talk breakdown remains a big near-term risk.
In addition, AMD has had success in gaining market share from Intel. But investors shouldn’t expect Intel to take that threat lying down. Intel is much larger and has more resources than AMD. At some point, Intel will get its house in order and come back with some major new tech that could stop the bleeding.
Finally, a new risk for AMD has emerged in September. The overall market has performed extremely well so far this month, but certain high-valued growth stocks have not.
AMD, Twilio (NYSE: TWLO), Roku (NASDAQ: ROKU) and other growth stocks are down this month. Given the overall market is higher, several analysts have attributed this phenomenon to a broad rotation out of high-valued growth stocks into more value-oriented names.
So far, the impact on AMD stock has been minimal. However, if this broader value rotation emerges as a longer-term market trend, AMD could be in for some selling pressure and even some earnings-multiple contractions in the coming months.
The Bottom Line on AMD Stock
AMD is down modestly in the past month, but I still believe AMD buyers will have a chance to buy the stock well below $30 at some point between now and the end of the year. Expectations and valuation are extremely high, and there are too many near-term headline risks.
I am a fan of AMD’s long-term prospects given its exposure to several of the biggest high-growth markets in tech. But AMD may need an extended consolidation period to allow its business to grow into its valuation. Potential investors should consider staying on the sidelines and watch for a better entry point.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.