With Advanced Micro Devices (NASDAQ:AMD) stock at all-time highs, can shares move even higher? Shares are up 148% in the past year, from $20.48 at the open Jan. 22, 2019 to $50.93 at the close Jan. 17. The stock continues to trade a substantial premium to even richly-priced peers like Nvidia (NASDAQ:NVDA). But so far in this runaway bull market, that has not been an issue.
There is some rationality behind the market’s bullish view on AMD. The chip-maker has proved the bears wrong time and time again in the past five years. But while AMD has materially improved their market share against rivals Nvidia and Intel (NASDAQ:INTC), does the current valuation make sense?
With the markets reaching new highs, it will be tough for the AMD rally to break. But if the company’s continued market share and revenue growth takes a breather this year, we may be soon reaching a top for AMD stock.
The Analyst Community Hedges on AMD Stock
As InvestorPlace’s Brad Moon wrote on Jan. 16, the analyst community is taking a cautious view on AMD stock. According to Seeking Alpha, out of 42 analyst ratings, 23 consider give the stock a “hold” or “neutral” rating. Only 15 out of 42 analysts tracked are bullish.
Yet only four analysts are bearish on AMD stock. With shares too hot to touch, very few want to bet against the company. A “hold” rating may be the analyst community’s way of hedging their bets as shares reach a frothy valuation.
But some analysts are upgrading their calls on AMD stock. Mizuho Securities analyst Vijay Rakesh believes AMD has more upside. Raising his rating from “neutral” to “buy,” Rakesh believes the company can continue outfoxing Intel in 2020. The analyst projects AMD’s server market share could rise from 4.8% to 9.1%. Yet as InvestorPlace’s Tom Taulli wrote Jan. 14, Intel may be getting their act together. Intel knows they dropped the ball, allowing AMD to gain the edge with their 7 nanometer chips. This year, Intel may use their massive scale, along with aggressive pricing, to claw back some of AMD’s market share gains.
The Mizuho analyst also cites chip sales to console makers as a reason why Advanced Micro Devices could continue to perform well. Microsoft’s (NASDAQ:MSFT) Xbox Series X and Sony’s (NYSE:SNE) PS5 both come out later this year. But while Rakesh is in the AMD camp regarding console chip sales, another analyst (Piper Sandler’s Harsh Kumar) is in the Nvidia camp. Kumar and his team “do not see AMD gaining much share in 2020,” citing Nvidia’s “must have gaming card.”
But the important debate is whether these catalysts are already priced into AMD stock. Let’s look at valuation, and see whether the stock’s current price is sustainable.
For AMD, “Priced For Perfection” Is an Understatement
Like a broken record, I’ve called AMD stock overvalued in my past analysis. But back in November (when shares traded around $40/share), I conceded AMD could move higher. With shares up more than 30% since, in hindsight my position was on the money.
Yet AMD stock was, and still is, overvalued. Investors have priced in the company’s key growth catalysts, and then some. Shares currently trade at 44.6 times estimated earnings for fiscal year ending December 2020. Compare that to Nvidia, which trades for 34.5 times earnings for its next fiscal year.
With AMD expected to grow sales by 28.5% in FY20, it makes sense the market has given the company such a rich valuation. At this level, AMD could grow into its valuation. But it’s tough to see shares make another 100% move this year, much less a 20-30% rise. Before 2019, the markets discounted AMD’s growth potential. Now, they are overestimating it by leaps and bounds. In other words, the often-used phrase “priced for perfection” may be an understatement.
But according to one Seeking Alpha contributor, being “priced for perfection” may not matter for AMD stock. While its debatable whether AMD’s valuation is sustainable, momentum is on the side of AMD. Technical traders continue to anticipate higher prices for the stock. With momentum investors holding so much sway, it may be tough to contrarian with AMD, even as shares trade at an absurd valuation.
With Earnings a Week Away, Take Profits If You Own It
AMD next releases earnings after the close Jan. 28. Strong results and guidance could give bulls more ammo to bid shares higher. Conversely, if it appears the company’s growth trajectory is starting to cool, expect issues sustaining the current valuation for this “story stock.”
So, what’s the call? If you own it, take profits. But if you are looking at shares today, it’s getting harder to see how the stock moves higher from here. With analysts hedging their bets, and price action driven only by momentum, AMD stock could be reaching a top.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.