Thanks to positive developments in the trade war, AMD (NASDAQ:AMD) stock is on the move. Shares are now up more than 137% for the year. AMD started 2019 trading at $18.01/share. At the close Dec. 18, shares changed hands at $42.30/share.
Advanced Micro Devices stock is now even more richly priced. Trading at 68.2 times 2019 earnings, and 38.6 times 2020 earnings, investor expectations are higher than ever. But can the chip maker see even greater upside in 2020?
Looking at fundamentals, it’s hard to justify the current AMD stock price. Yet, investors should not bet against AMD on valuation alone. With growth catalysts in motion, shares could move even higher in the coming year. Let’s dive in and see what the verdict is.
Trade War Cool Down: Icing on the Cake for Advanced Micro Devices Stock
Market share gains have been key in driving the AMD stock price higher. AMD’s CPU market share is on fire, much to the chagrin of Intel (NASDAQ:INTC). Their 7nm Ryzen 3000 processors pose a serious challenge to Intel’s market power. As a result, Intel is well aware the heat is on. A market share threat may be what’s behind Intel’s move to acquire AI chip firm Habana Labs. With the Habana Labs bolt-on, Intel can shake its reputation as a “dinosaur” and get back on track with innovation.
In the GPU arena, Advanced Micro Devices is going toe-to-toe with rival Nvidia (NASDAQ:NVDA). While Intel is slow to meet the AMD challenge, NVDA has met the challenge of AMD’s Navi graphic cards with their RTX line of GPUs. In the third quarter of 2019 (Q3 2019), Nvidia managed to gain back much of its market share lost to Advanced Micro Devices. Nvidia’s Q3 market share was 72.9%, compared to 67.9% in the prior quarter.
But AMD is not out of the fight. Year-over-year, their GPU market share has improved to 27.1% from 25.7%. The company also has a budget-friendly Navi card coming out this quarter. Expect AMD and Nvidia to continue competing on price and performance in 2020.
Strong CPU and GPU alone was enough to more than double the AMD stock price. Yet, the trade war cool down adds even more fuel to the fire. While “phase one” doesn’t mean we are out of the woods just yet, progress lessens the albatross across the chip space’s neck. As InvestorPlace’s Will Healy discussed Dec. 13, trade relations between the U.S. and China matter greatly for Advanced Micro Devices.
Putting the Cart Before the Horse
Things are going well for AMD. But pivoting to valuation, optimism may have pushed the AMD stock price well above its intrinsic value. As I mentioned above, AMD trades at a high P/E multiple. In contrast, Nvidia and Intel sell at lower valuations.
Nvidia trades for 41.4 times FY2020 (year ending January 31, 2020) earnings, and 31.9 times FY21 earnings. Intel sells for 13.1 times 2019 earnings, and 12.9 times 2020 earnings. Comparing P/Es between Intel and Advanced Micro Devices stock is not apples-to-apples. Intel’s slow growth justifies a low valuation.
But it is AMD’s premium to Nvidia that makes little sense. Both companies face similar challenges and opportunities. While AMD stock has gained big in terms of CPU market share, the GPU battle is far from over.
As a result of AMD stock’s high valuation, some analysts believe the market has put the cart before the horse. Back in November, Northland Capital Markets analyst Gus Martin said to take profits on AMD shares. He believes 2020 will be a peak sales year for AMD. This is due to many factors, including gains in the server chip market, along with a new gaming console cycle.
Is he correct? You cannot deny Advanced Micro Devices stock more than priced-in potential upside. While investors who took Gus Martin’s advice lost a little when the trade war news sent shares higher, we may be reaching a top in AMD. Then again, it’s not fundamentals driving this story. Until investors lose confidence in AMD’s future prospects, expect shares to either stay at current levels, or march higher as more good news supports the bull case.
Don’t Bet Against AMD Stock—But Think Twice Before Going Long
Where will Advanced Micro Devices stock trade in 2020? While a correction seems due, the bulls seem to be in control of the AMD stock price. Value investors such as myself may hem and haw that AMD is “priced for perfection.” But the market can stay irrational longer than you can stay solvent.
I wouldn’t bet against AMD stock, but I wouldn’t go long, either. Chasing momentum at today’s prices is not the play. AMD is trading close to its dot-com bubble highs. It’s hard to call a top, hence my reluctance to go short. With this mind, stay on the sidelines. All bets are off on whether AMD can sustain its current frothy valuation.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
