Baird analyst Tristan Gerra recently reiterated his “neutral” rating on Advanced Micro Devices (NASDAQ:AMD) stock. More importantly, Gerra raised his 12-month target price on Advanced Micro Devices stock by $10 to $40 per share.
I am not in the least bit surprised by this price target increase.
Analysts Remain Skeptical on Advanced Micro Devices Stock
In early November, my price target for AMD stock was closer to $44, well above analysts’ average price target at the time of $34.
CEO Lisa Su’s excitement about 2020, combined with the fact that the company had been taking market share, had me upbeat on Advanced Micro Devices stock.
However, just because Gerra raised his price target doesn’t mean the other analysts are going to follow suit.
Of the 40 analysts who cover Advanced Micro Devices stock, only 15 have a “buy” or “overweight” rating, while 22 have “hold” ratings and three have “sell” ratings. Not only that, but their average price target on AMD stock is $35.34 per share, more than $4 below where it’s currently trading.
Gerra cites several reasons for his “neutral” rating.
“AMD is a market share growth and turnaround story, with gains both in PCs and in the higher-margin data center market with Epyc,” Gerra said in a December note to Baird’s clients. “However, high stock valuation, a seasonally weak first-half 2020, ongoing macro risks, and a more aggressive ramp from Intel as it recovers from shortage issues, keep us on the sidelines with a neutral rating.”
AMD’s Lisa Su is an excellent CEO.
That said, I think the easy gains of AMD stock have already been realized. Over the past one year, three years, and five-years, AMD stock price has soared 92%, 56%, and 74%, respectively. As a result, AMD stock price, in all likelihood, won’t surpass $45 in 2020.
The Excessive Valuation of Advanced Micro Devices Stock
Another InvestorPlace columnist, Dana Blankenhorn, recently suggested that AMD stock is overvalued right now.
“Chip makers shouldn’t be selling at 7.2 times sales. AMD is having good times, but its earnings are only up 35% from 2015, and its great September quarter saw earnings of just 11 cents per share. Even if it kept that pace for a full year, which it never does, you’re looking at 84 times earnings. The actual price-to-earnings ratio is closer to 200,” Blankenhorn stated,
“At the end of September AMD still had just $1.2 billion in the bank. That’s enough to cover its $864 million in long-term debt, but the company is still generating negative free cash flow,” Dana added in his Dec. 3 column.
He went on to explain that, since Taiwan Semiconductor (NYSE:TSM) actually makes AMD’s chips, a red-hot trade war with China would likely put AMD out of business.
Its much bigger rival, Intel (NASDAQ:INTC), would suffer a blow or two because it has a plant in China. Still, since INTC had $14.7 billion of free cash flow over the 12 months that ended in September compared to -$50 million for AMD, the latter firm would clearly have an easier time riding out a protracted trade war.
The Bottom Line on Advanced Micro Devices Stock
As much as I like what Lisa Su’s done in her five years as AMD’s CEO, stocks with super-high valuations would be the first to get crushed if a permanent trade deal is not made in the first half of 2020.
More importantly, while the odds of a recession hitting before the November 2020 presidential election are slimmer than they were a few months ago, most, if not all, stocks would get taken out to the woodshed if the U.S. economy does enter a recession.
Stocks like AMD which are trading at more than seven times sales would most certainly get taken down a peg or two. In the 11th year of a bull market, any sign of weakness will send many owners of AMD stock scurrying for the exits.
Investors who own Advanced Micro Devices stock shouldn’t sell their shares. But don’t expect AMD stock price to soar in 2020. Those who don’t own its stock should look elsewhere for double-digit-percentage gains.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.