AMD Looks Too Bubbly in the Wake of Its Impressive Recovery

Conservative investors appear to be right. Advanced Micro Device's valuation is stretched.

For the most part, successful tech turnarounds are quite rare. When a company starts to falter, the employees often leave in droves. Customers also get antsy and look for alternatives. To get a sense of the challenges, look at companies like BlackBerry (NYSE:BB) and Nokia (NYSE:NOK). Despite deep restructurings, the results have proven to be disappointing.

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Yet when a tech company is able to pull off a turnaround, the gains can be amazing. Just consider the examples of Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE).

But perhaps the most impressive — during the past few years — is Advanced Micro Devices (NASDAQ:AMD). When Lisa Su took the helm in late 2014, the prospects for the company looked grim. There was even buzz that AMD would file for bankruptcy, as the company had been marginalized by the mighty Intel (NASDAQ:INTC).

Such things, though, did not deter Su. She understood the huge potential of AMD and implemented a solid plan to get things back on track. More importantly, her execution has been near flawless.

Can Su Save the Day Again?

The result: AMD stock has been one of the best performers, going from under $2 in 2015 to over $50 today. The market capitalization is at about $62 billion.

Can this momentum continue? Or have things gotten too giddy? Well, actually the overall tech market does look frothy. Investors keep pouring money into the sector because of the secular growth opportunities.

However, there are still limits. And there are signs of toppy behavior. This is why I think it’s probably a good idea to get more cautious on AMD stock. First of all, while the company has certainly been adept at pushing innovation, the fact remains that part of the success has come as the result of the missteps from Intel, which has had quality issues, delays and shortages. Yet it does look like management is starting to clean things up. After all, the recent earnings report shows that these actions are starting to move the needle. Keep in mind that there was better-than-expected growth in the data center segment. This should be ominous for AMD stock since a big part of the company’s success has come from this business.

But there are other headwinds. One is that Microsoft’s sunsetting of its Windows 7 operating system — which has lifted the PC market — will start to fade. This could weigh on CPU sales.

Then there is the intense competition in the graphics processing unit (GPU) category. Nvidia (NASDAQ:NVDA) has been accelerating its growth here, as seen with the latest earnings report.

In the meantime, there is some concern about AMD’s leadership. That is, might Su stay on board? It’s far from clear. But hey, there were rumors that she would take the top spot at International Business Machines (NYSE:IBM).

Bottom Line On AMD Stock

The forward price-to-earnings ratio on AMD stock is roughly 33 times. For a semiconductor stock, this is definitely stretched. Interestingly enough, Wall Street analysts are also less sanguine than the market. The average price target is $49, which assumes 8% on the downside.

Note that this week Wells Fargo analyst Aaron Rakers downgraded the stock, writing: “We’re positive on AMD’s competitive positioning and share-gain story. However, at current levels, and based on our new sum-of-the-parts (SOTP) analysis, we are downgrading to equal weight from overweight as we see shares approaching levels that present a more balanced risk/reward; discounting a 2022E $2.50+ EPS upside.”

Now it’s true that analysts can be off the mark. But in this case, I think their more conservative stance is on target. For the most part, there are considerable risks with AMD stock, which are not sufficiently baked into the valuation.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/amd-looks-too-bubbly-in-the-wake-of-its-impressive-recovery/.

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