If you were an investor in Advanced Micro Devices (NASDAQ:AMD) back in 2015, you must be foaming at the mouth. The company’s share price has gone from a measly $2 per share up to a current level of around $50 in those five years. AMD stock is now valued at over $58 billion, and has generated massive returns for its investors.
Just don’t trust that these returns will continue.
The truth is, any upside to AMD stock has all but vanished. The company is trading at an all-time high, with an astronomical trailing price-earnings ratio above 120, dwarfing its main competitors Intel (NASDAQ:INTC) which is trading at a price-earnings ratio of about 11.4, and Nvidia (NASDAQ:NVDA), trading at 71 times trailing earnings. Other metrics of the company’s stock price, like price-to-book (20) and price-to-sales (8.3), show a stock that is simply too overvalued given its current business.
Buying the stock right now would be putting an egregious premium on the company’s ability to continue rapid growth in a sector with increasing competition. That is generally a disaster waiting to happen.
Reverberations From Apple and Intel
Earlier this month, Apple (NASDAQ:AAPL) announced that it was breaking its long-term relationship with Intel and opting to produce its own processors for its Mac computers. While this frees up Apple to bring chip production in-house, it also leaves Intel seeking new business of its own.
So, Intel just lost a piece of business which has been a reliable profit machine for over a decade. Now, the executives at Intel will probably choose to pivot toward growing other areas of their business.
This will come to have a direct negative impact on the business of AMD. Intel will no longer overlook the market share AMD had in certain areas of the processing industry. Instead, I suspect we will see the massive $244 billion company turn its massive size and influence to these areas — and it has the ability to outspend any of its competitors.
Increased Competition? Stay Away From AMD
The Berkeley Economic Review noted in 2019 that AMD had stolen CPU market share away from Intel by providing similar computing power in its processors at a discount to both businesses and consumers. This helped AMD’s market share jump from below 20% to above 30%.
Now that Apple is out of the picture, it’s likely that Intel will looks toward the lower end of the consumer market to increase sales. Doing so would require reducing prices to bring them more or less in line with AMD, which would then have to compete on price. AMD has already started lowering prices on its new processors as a result, which could lead to lower profits overall.
And there is another competitive threat to AMD that should not be ignored. Nvidia is still a powerful contender with AMD in the graphics card market. Nvidia has plans to release both high-end, and affordable graphics cards that will rival AMD on both quality and price. Nvidia’s next round of cards are highly anticipated.
No one is saying that AMD isn’t a solid company that has exceeded expectations over the past several years. But there is no reason to believe that the company has any upside at its current valuation. Pulling the trigger on an AMD stock purchase order today could mean buying it at its peak.
As of this writing, Dan Pelberg did not own shares in any of the aforementioned securities.
