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Here’s Why Advanced Micro Devices Isn’t Rallying Now

Only time will tell if the wild advance in Advanced Micro Devices (NASDAQ:AMD) stock is over. AMD stock peaked in mid-February at $59.27. At the time, markets chose to ignore the ongoing concerns of the new coronavirus from China and its impact on the global economy. But in the last week, sentiment completely shifted. As they say, stocks take the stairs on the way up and the elevator on the way down.

Source: Akura Yochi / Shutterstock.com

The 2008-like selling in the last week made stocks look like they took the cliff down. And AMD stock was not spared. Should investors continue holding the company if even Microsoft (NASDAQ:MSFT) issued a warning on revenue estimates?

Chances are high that if PC operating system sales and Microsoft Surface tablet sales are on the decline, AMD’s PC chip (CPU) and graphics card (GPU) sales will also fall.

AMD Stock Was Not Spared

Intel (NASDAQ:INTC) also fell victim to the stock market selling in the last week, erasing gains made since November 2019. But AMD’s rival, Nvidia (NASDAQ:NVDA), posted strong fourth-quarter results. It also forecasts strong first-quarter revenue of $3 billion. In Q4, Nvidia’s gaming unit reported revenue growing 56% year-over-year to $1.5 billion. Data center revenue grew 43% to $968 million.

Nvidia’s strong results in the gaming market suggests something different. Analysts thought Nvidia would earn $1.6 billion to $1.75 billion in revenue. But when the company posted revenue of $1.5 billion, it significantly missed expectations. This suggests that AMD Radeon GPUs are pressuring Nvidia’s RTX ray tracing cards.

In fact, if AMD sold more GPUs than Nvidia, then AMD had a 19% share of the GPU market. Nvidia lost almost 1% of the market and now has an 18% market share.

Intel still commanded the GPU market with 63% of the market share, thanks to its integrated chip. Still, AMD’s Ryzen 2400 and Ryzen 3400, which both have Vega-powered GPUs, are vastly better processors with better graphics performance than Intel. AMD just needs to chip away at Intel’s market share.

Opportunity Versus Downside Guidance

AMD posted a downside outlook in its Q4 2019 report. It said that Q1 revenue will be in the range of “$1.8 billion, plus or minus $50 million, an increase of approximately 42 percent year-over-year and a decrease of approximately 15 percent sequentially.” The relatively new products of Ryzen, EPYC and Radeon will drive sales.

Conversely, the refresh in gaming consoles will hurt semi-custom revenue. So, AMD stock may not take off until the launch of the next generation of Xbox and PlayStation consoles.

For the full year 2020, AMD forecast revenue growing 28% to 30%. Non-GAAP gross margin will be approximately 45%. With this guidance, investors may assume revenue growing by at least 25% over the next five years. In a discounted cash flow model: revenue exit, apply the following metrics:

Metrics Range Conclusion
Discount Rate 11.5%-12.5% 12%
Terminal Revenue Multiple 4.5x-5.5x 5x
Fair Value $54.57-$68.15 $61.23
Upside 20%-49.9% 34.6%

Data courtesy of finbox.io (click on the link to update assumptions)

My Takeaway on AMD Stock

Source: Chart by Stock Rover

Below, AMD scores high marks on quality. Only Xilinx (NASDAQ:XLNX) and Analog Devices (NASDAQ:ADI) scores better.

AMD’s valuations were reasonable when markets were not fearful. But as last week demonstrated, Advanced Micro Devices is vulnerable to correcting further.

The company’s valuation is the only thing holding the stock back from climbing higher. Investors who hold the stock for at least a year will still get rewarded as chip revenues grow and console sales add to the cash flow.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/03/amd-stock-rally-held-back-by-valuation/.

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