After the novel coronavirus outbreak, many stocks are struggling to bounce back. But not Advanced Micro Devices (NASDAQ:AMD) stock. The chipmaker’s shares may have fallen more than 30% during the pandemic-driven sell-off. Yet, the stock has rebounded tremendously while markets have only modestly recovered.
AMD shares are trading around $56 per share, not too far from their 52-week high. But, why are investors bidding up this company? Despite its impressive growth story these past few years, Advanced Micro Devices is in a boom-and-bust industry (CPU and GPU chips).
This is the type of company that performs badly in an economic downturn. What gives? Well, that cliche “this time it’s different” may actually apply to AMD stock. As InvestorPlace’s Mark Hake discussed April 21, Wall Street still believes in the company’s strong growth prospects.
Also, the “stay at home” economy may soften the blow for AMD. The company’s downside risk may be lessened by this unique aspect of today’s economic downturn.
However, things could change pretty quick. If earnings fail to live up to expectations, or if the company revises guidance, shares could see a pullback. With this in mind, it may pay to take the money and run.
What Could Sink AMD Stock?
If you’ve read my past articles on Advanced Micro Devices, you know full well my bearish stance on the company. Granted, I’ve been proven wrong time and time again, given the stock’s tremendous performance from late 2019 through early 2020.
However, AMD’s wild ride may not last forever. It’s hard to believe that this company will thrive during a recession. A coronavirus-driven downturn means bad news for the company. Any dent in the company’s performance, and the stock’s perceived invincibility disappears overnight.
Granted, AMD weathered the last chip glut quite well. The oversupply of GPU chips from 2018-2019 wasn’t good for sales. Yet, with the company gaining market share at the expense of Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC), shares continued to move higher.
However, this happened while the economy was in full swing. With an economic slowdown, it’s going to be tougher for the company to meet aggressive growth targets. Analysts project that sales will climb from $8.57 billion this year to $10.3 billion in 2021. In other words, around 20% growth.
Earnings are expected to grow even faster, from $1.11 per share this year, to $1.57 per share next year. That’s more than 40% earnings growth year-over-year.
Yet, a weaker economy may mean the company fails to meet expectations. The investment community has priced shares based on these estimates. Anything less, and shares could fall back to prior price levels. Or lower.
On the other hand, I may be blinded by bearishness. The uniqueness of this downturn may mean things may wind up better for AMD stock than I predict.
Why Advanced Micro Devices Could Prove The Bears Wrong
It seems like a no-brainer to assume a recession means bad things for the company. Yet, this downturn is much different than those of recessions past. The factors driving the slowdown (forced closing of bricks-and-mortar businesses) affect some industries much more than others.
Airlines, restaurants and other service businesses are in big trouble. The longer social distancing lasts, the more money flies out the window. But, for other industries, coronavirus could help drive growth.
This is one reason why RBC’s Mitch Steves remains positive on AMD. The analyst recently broke down who wins and who loses in the semiconductor space post-outbreak.
Fortunately for Advanced Micro Devices, the company appears more on the winning side. Millions working from home could shorten the PC replacement cycle. This benefits the company’s CPU business. The stay-at-home economy also means increased demand for video games. This is good for the company’s GPU business.
In short, I can see why AMD stock remains hot. But, with shares trading at forward price-earnings ratio of 51.3, it’s still “priced for perfection.” You could easily buy another company with similar dynamics, Nvidia, at a lower valuation (38.4 times forward earnings).
Sell AMD Stock Ahead of Earnings
Advanced Micro Devices reports results for the first quarter on April 28. If you already bought the stock at lower prices, this may mean now could be a great time to sell.
Yes, the company could beat estimates, and rally higher. But, what if earnings disappoint, and the company revises guidance? A bird in one hand is worth two in the bush. Cash out now, while markets remain enthusiastic for this “too hot to touch” stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.