Advanced Micro Devices (NASDAQ:AMD) stock is one of the few names on Wall Street that is still doing reasonably well despite the market correction. It is down about 10% in 2020, although its stock price had stayed mostly flat until Thursday’s selloff.
Granted, AMD stock is still down over 24% from its peak. But it is still double its 52-week lows.
Moreover, the stock, although trading at a very rich 42 times forward earnings, has not cratered. Investors can’t say the same about many other highly valued names. One reason for this is that the company has not revised its earnings, as many others have.
Earnings Should Stay Stable in 2020
For example, on March 5, as the coronavirus from China raised panic, the company held a “Financial Analyst Day.” Among the presentations on its investor relations website, CFO Devinder Kumar’s presentation stood out.
It indicates that huge growth in revenue is expected in 2020. For example, revenue in 2019 grew 16% on a long-term compounded annual growth rate (CAGR) basis. For 2020, AMD expects a 28% to 30% long-term CAGR.
It also expects flat earnings per share growth. This is actually an accomplishment, as so many companies are forecasting earnings downturns.
Part of the reason the company does not expect the coronavirus to have much of an effect on its sales is that it sells gaming chips. Gamers don’t go out and interact with the world. They won’t be getting the virus.
The same sort of reasoning applies to its data center chips and CPU chips. People are not going to stop computing or gaming because there is a pandemic. In fact, they might want to do more computing and gaming.
Advanced Micro Devices’ Outlook
Analysts came away from the Financial Analyst Day impressed. For example, Jefferies raised its AMD target from $58 to $60 after the event.
According to Seeking Alpha, the Jefferies analyst said AMD “presented a compelling strategy and roadmap.” That will position it ahead of rival Intel (NASDAQ:INTC) in microprocessors and help it gain CPU parallel processing share.
Another analyst on Seeking Alpha wrote a glowing report about AMD’s technological advancements presented at the conference. The analyst said that AMD continues to build on the momentum it started to create a few years back.
And yet another analyst wrote an article stating that the short interest in AMD stock keeps falling. This means there are fewer people betting that AMD stock will drop significantly.
I suspect that the stock will continue to drift lower along with the market. Its price-earnings ratio is still very high. Moreover, its enterprise value-to-EBITDA ratio, a cash flow measure, is even higher at close to 50 times.
Those are very high ratios for a stock to have zero growth in earnings, despite all of its revenue growth.
What Should Investors in AMD Stock Do?
Barron’s recently published an article on why Wall Street loves AMD stock so much. In short analysts like the huge targets over the next four years that Advanced Micro Devices is projecting.
The core reason why analysts like AMD so much is because they believe it is now finally going to take back a higher semiconductor market share. This applies to both its personal computer and data center businesses.
If those predictions come true, then maybe the stock is worth the high valuation that Wall Street has put on it. But my point remains. You pay for what you get. You are paying a premium price for a premium growth company.
There is no bargain element involved. Moreover, the company has to perform. If it doesn’t then, AMD stock will struggle. Let the buyer beware.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.
