With positive trade deal news on the table, things are looking up for Advanced Micro Devices (NASDAQ:AMD) stock. The company next announces earnings at the close Oct. 29. With shares trading near $31, Advanced Micro Devices stock is almost 15% below its 52-week high. But shares remain overvalued. While the company has made big market share gains at Intel’s (NASDAQ:INTC) expense, much of the upside is priced into the AMD stock price.
So what’s the play with AMD stock? Do you buy before earnings, wait for a fallout or skip the stock entirely? Let’s take a closer look and see whether now’s the time to buy AMD stock.
Recent News With AMD Stock
In both the CPU and GPU spaces, AMD has seen significant headway. Among CPUs, AMD is clearly eating Intel’s lunch. The company saw its share of CPUs shoot up to 30%, a level not seen in more than a decade. AMD had another clear win when Microsoft chose its chips to power the Surface laptop. But AMD’s success vis-a-vis Intel may be due to Intel’s chip shortage. Intel did not have enough 14-nanometer sized processors to meet demand. AMD stepped in, sopping up additional market share.
But AMD may have chip supply issues of its own. Unlike Intel, AMD does not operate its own foundries. Instead, it contracts the work out to Taiwan Semiconductor Manufacturing Company (NYSE:TSM). This chip shortage could impact both AMD’s Ryzen CPUs and Navi GPUs. So far this has been speculation, but if more comes out of it, it could be a key risk to consider.
In the GPU space, AMD continues to beat Nvidia (NASDAQ:NVDA). AMD’s market share is now larger than Nvidia’s — a feat not reached since 2014.
How about the trade war? As InvestorPlace contributor Brad Moon discussed Oct. 15, things are looking up regarding a deal. Both sides are making progress, agreeing to ease trade tensions. U.S. tariffs set to go into effect have been delayed. We could be on the road to smooth sailing regarding U.S.-China trade relations.
But these things can turn on a dime. Add in a rich valuation, and despite its prospects, AMD stock does not look like a hot opportunity. Let’s take a closer look at valuation and see why it’s a key concern.
Advanced Micro Devices Stock Remains Overvalued
AMD stock trades at a high valuation. The company has a forward price-to-earnings ratio of 65.8. This vastly exceeds those of Nvidia (forward P/E of 46.9) and Intel (forward P/E of 12.7).
Advanced Micro Devices stock also trades at a high enterprise value/EBITDA ratio. The company’s EV/EBITDA is a staggering 67. That makes Nvidia’s 43.1 times EBITDA multiple look cheap by comparison. Considering both stock’s valuation, Intel trades at a rock bottom EV/EBITDA ratio of 7.7.
These valuations imply investor sentiment remains high for both AMD and Nvidia. But is this exuberance rational? While AMD is making big gains in both CPUs and GPUs, the company is still recovering from a big sales decline in 2018-2019. The GPU chip glut weighed heavily on AMD’s performance. Sales in 2018 were for $6.5 billion. But for the trailing twelve months, sales were just $5.9 billion.
Analysts expect $1.8 billion in revenue for the quarter. If the company can beat these expectations, it will be clear the turnaround is on track. It will mean the company meets 2019 revenue estimates of $6.8 billion and is on track to materially increase these revenues to $8.4 billion by 2020. Maintaining positive sentiment is key to keeping the AMD stock price moving higher.
But even if the company meets expectations, this upside is likely already priced into AMD. Given the substantial premium AMD stock trades relative to Nvidia, investors are not getting much value. And while AMD could steal even more of Intel’s market share, it will take monumental growth for Advanced Micro Devices stock to “grow into its valuation.”
Bottom Line: Look Elsewhere for Opportunity
Things are looking up for AMD stock. But the company’s valuation remains a top concern. While AMD’s performance is set to improve materially over the next year, the company would need substantially greater levels of growth to justify its current valuation. Investors today are paying for tomorrow’s “best case scenario,” and then some. If things do not go as planned, expect big declines in the AMD stock price.
With earnings set to be released later this month, investors could take a gamble and load up on Advanced Micro Devices stock today. Likewise, if results fail to meet expectations, they could load up after a dip in AMD stock.
I suggest neither play. There are other solid opportunities out there. Avoid paying an inflated valuation for AMD stock, and consider opportunities with fewer headwinds and simpler pathways to growth.
As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.
