AMD Stock is Going From Strength to Strength but Beware of Its Valuation

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Advanced Micro Devices (NASDAQ:AMD) stock is probably one of the few names near its previous market highs. Its 52-week high is $59.27 and AMD stock eked out a less-than-1% gain on Monday to close at $56.97. That is quite a feat for a company with an equity market value of $66.7 billion.

AMD stock

Source: AMD

It looks like AMD stock is set to continue to do well. But beware of its valuation. Right now the market believes the company’s story about significant growth over the next several years.

Fierce Contender Against Rivals

Advanced Micro Devices’ chip business is going from strength to strength. I reviewed AMD’s amazing technology comeback in my last article on AMD in January. There are also anecdotal reports that AMD’s chip technology success is continuing.

For example, a Bank of America analyst wrote that AMD’s latest gaming chip, NAVI, is catching on with gamers even faster than its previous gaming chip. Moreover, AMD’s new Epyc server high-frequency processors were just launched for enterprise workloads. They are meant to compete with Intel (NASDAQ:INTC).

Moreover, Marketwatch recently reported that AMD’s server chips have become a fierce contender against Intel. The article went into detail how AMD’s chips in both the gaming and server market are gaining market share against competitors.

For example, people confined at home are using more devices with chips that power data centers and cloud services for gaming and internet connections. AMD expects to show a strong second half to 2020. Demand for video-game consoles and graphics chips is expected to increase.

In fact, despite what some analysts are saying, Marketwatch said AMD is still predicting success. It has yet to backtrack from its long-term outlook as it banks on its continued rollout of 7-nanometer-based chips.

Survival Nature Makes it Expensive

AMD stock is up from its lows because it reflects this strength. For example, earlier in March Piper Sandler analyst Harsh Kumar upped his rating on AMD stock. Barron’s reported that the analyst said AMD is extremely well-positioned in its laptop/desktop and data center markets.

The analyst set his earnings per share figure for 2020 at $1.09 and $1.59 for 2021. That puts AMD stock on a price-to-earnings ratio of 35.6 times earnings for 2021.

That is not a cheap valuation. However, it reflects the survival nature of AMD stock at this point. In other words, everything has to go well for the company to justify this high valuation and the recent stock price rise.

For example, Barrons’s also reported recently that during AMD’s recent investor day, the company projected plans to increase its sales 20% annually through 2023. In addition, it expects to generate gross profit margins of above 50% over time.

That is what the market seems to be counting on with AMD stock. This helps make the shares appear cheaper on a longer-term outlook basis.

What Should Investors Do With AMD Stock

AMD will release its earnings after the market closes on Tuesday, April 28. Investors will be looking to see if the company is on track to deliver the trend line growth in revenue and earnings it promised in its investor day presentation.

I suggest investors wait for another opportunity to buy AMD stock on the cheap. Even though it is one of the better-performing stocks in the market, it is no bargain. A lot of things have to go well over the next several years to justify its valuation today.

For example, analysts polled by Seeking Alpha expect Q1 earnings to be 18 cents per share on revenue of $1.79 billion. This represents significant earnings per share growth over last year (six cents per share). But last quarter’s earnings were much higher at 32 cents per share.

However, don’t put too much stock in the drop in sequential earnings. AMD’s earnings are highly seasonal. Chip sales for gaming processor units (GPUs) tend to peak at Christmas time.

Nevertheless, investors will want to see if AMD adjusts its forecasts for 2020 and 2021 based on the severe drop in economic activity this past quarter and likely this next one as well. AMD seems to be able to avoid a lot of that damage. But investors will want to see that in both the Q1 numbers and AMD’s forecasts.

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.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/amd-stock-price-valuation-high/.

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