There’s no denying that Advanced Micro Devices (NYSE:AMD) has been a break out star in the semiconductor space. AMD stock is up 40% since the beginning of the year and the firm looks poised to continue stealing market share from its rivals Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) in the year to come.
However, all of those catalysts appear to be baked into the AMD stock price right now. Additionally, potential fourth-quarter turbulence means investors might get a better entry point down the road.
Bright Future for AMD Stock
Advanced Micro Devices stock looks like a winner in 2020 and beyond. Over the past few years, AMD has been chipping away at the market share of its peers INTC and NVDA, and that’s seen continuing in the coming year. AMD beat Intel to market with its 7 nanometer chips and Intel isn’t seen bringing out a competing product until 2021.
That means AMD has more time to get out in front and pick up would-be Intel customers for the next 12 months. That also gives the firm time to work on the next generation of chips well in advance of Intel, further widening the gap between them.
Gaming to Pick Up
Plus, next year should be a big one for AMD’s semi-custom chips, which are used in gaming consoles. This year, demand for semi-custom chips was lackluster as gamers waited for new gaming consoles to be released. The majority of the gaming updates are set to come to market next year, meaning AMD will likely see a bump from renewed demand in the sector.
AMD has also inked a variety of deals with big names like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and International Business Machines (NYSE:IBM) to use Advanced Micro Devices chips in their latest products. That’s a good sign for the firm’s upcoming year and further evidence that AMD is becoming a top dog in the semiconductor space.
Growth Hurdles
It’s important to note that although the future for AMD stock looks rosy, the company isn’t immune to the risks that the rest of its peers are facing. Not only is AMD susceptible to a pullback in consumer spending and a downturn in the economy, but the firm is extremely susceptible to any further escalation in the trade tension between the U.S. and China.
At the moment, Beijing and Washington appear to be making strides toward putting an end to the ongoing trade war. But as we’ve seen over the past year, rhetoric can turn on a dime. For now, negotiations between the two sides are a boon for AMD stock. However, investors should keep in mind that sentiment could change without warning.
Valuation
However, the trade war with China isn’t a problem specific to AMD — everyone in the industry is facing the same worries — so it doesn’t make the firm any less desirable than its peers. What is worth noting though, is that AMD’s valuation is much higher than its rivals. The firm’s price-earnings ratio is a whopping 166.7 compared to Intel’s 12 and NVDA’s 51. AMD trades at nearly 50 times its forecasted earnings, putting it head and shoulders above the rest of the industry.
That’s not necessarily unwarranted — AMD stock is more expensive because it’s got more potential. But, if you consider what AMD has left in the tank this year versus where it’s already trading, it doesn’t look like the best use of your capital.
According to the Wall Street Journal, the average analysts’ price target for AMD stock is $33. That’s just about 4% away from where the stock is trading today. This earnings seasons has been a roller coaster with several factors weighing on valuations. With AMD set to report next week, I wouldn’t rush into taking a position just yet.
The Bottom Line
If you already own AMD, or you want to start establishing a position slowly, the firm looks like a great long-term bet in the semiconductor space. However, to finish out 2019, there doesn’t look to be any major growth catalysts. So, your capital could be better deployed elsewhere.
AMD’s future prospects look baked into the firm’s share price. And while that doesn’t make it a bad long-term pick, it won’t deliver the most bang for your buck over the next few months.
As of this writing, Laura Hoy was long AMZN, AAPL and IBM.
