Take Profits Now, Because AMD Stock Gains Have Out

On the news of its first-quarter results, Advanced Micro Devices (NASDAQ:AMD) lost some steam, even though the overall market was up big. Note that the price fell 5% to $53. But then again, since mid-March, AMD stock was able to log an impressive return of about 42%. So yes, it seems reasonable that there would be some profit-taking.

Take Profits Now, Because AMD Stock Gains Have Maxed Out
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OK, let’s take a look at the quarter. The adjusted earnings came in at 18 cents a share and revenues hit $1.79 billion, up 40% on a year-over-year basis. And for the most part, the numbers were in-line with the Street consensus.

Unlike many tech companies such as Intel (NASDAQ:INTC), AMD provided guidance for the current quarter and even the full year.

Yet the forecast was a bit of a disappointment, as the novel coronavirus is expected to weigh on growth. For the second quarter, the company predicts revenues at about $1.85 billion. But the analysts’ estimates were for $1.92 billion.

What about for 2020? Well, AMD is forecasting an increase in revenues of about 25%, but the prior guidance was for 28% to 30%. Thus, it could be tougher for AMD stock to churn out strong gains. Note that the weakness may not only be due to softening consumer demand for PCs but perhaps even for data center spending.

AMD Stock Drivers

No doubt, AMD is an impressive company. Despite its relatively small size, it has been able to push innovation, such as with its 7nm chip technology, and compete effectively against giants in the industry. The company is also showing nice economies of scale, as seen with the improvement in margins.

True, the company has a complex global supply chain.  Yet AMD has been able to make the right adjustments for the coronavirus and maintain its production.

There has also been continued strength in the data center business, which is powered primarily by the EPYC processor. Just some of the customers for the quarter included Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), IBM (NYSE:IBM), Oracle (NYSE:ORCL) and Microsoft (NASDAQ:MSFT). Then again, AMD’s EPYC processors have compelling pricing as well as strong performance and energy efficiency, especially for high-compute environments.

But in the quarter, there was also significant demand for the Ryzen and Radeon chips (which are amorality for graphics applications). This segment posted a sizzling 73% spike in revenues to $1.44 billion. For example, Acer and ASUS launched new notebooks with the AMD Ryzen 4000 mobile chip. Lenovo also used the chip for its business notebooks.

What’s more, AMD is gearing up for the new game consoles from MSFT and Sony (NYSE:SNE). They are expected to hit the market in time for the holiday season for this year.

Bottom Line on AMD

So yes, AMD had a quarter. However, it does look like much of the good news is already baked into the stock price. Consider that the shares trade about 50 times forward earnings, which is certainly rich given the company’s revenue forecast for the year. In fact, the Street’s price target is roughly $51, which assumes 6% downside from current levels.

And finally, AMD’s forecast should be taken with a grain of salt. Let’s face it, the current environment is unprecedented.

Here’s what Bernstein analyst Stacy Rasgon had to say:

“Even amid COVID-19, expectations for AMD have been rising given end-market exposure and [the] share-gain narrative. However, the stock has risen markedly as well, potentially dangerous in the current low-visibility environment, and frankly even when things were clearer the company has had a hard time judging their trajectory (this is the 8th quarter in a row that management has guided below consensus).”

There are also some potential wild cards. Perhaps the biggest is that INTC may launch a price war to reclaim some of its market share. Besides, the company is making improvements in its own chips.

Thus, it is probably best to be cautious on AMD stock right now.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-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/2020/05/take-profits-amd-stock-gains-maxed-out/.

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