In my most recent article about Advanced Micro Devices (NASDAQ:AMD) on July 20, I wondered what it would take for AMD stock to get out of its funk. Trading in a tight range between $50 and $55, I offered several examples.
Well, precisely eight days later, I got my answer. Solid earnings.
AMD Stock Delivers and Then Some
AMD reported second-quarter results that were off-the-charts good, generating $173 million in operating income (207% higher year-over-year) from $1.93 billion in revenue (26% higher YOY). InvestorPlace’s Brad Moon discussed its performance a few days after the release of its earnings. My colleague focused on the fact it raised its 2020 revenue outlook.
“AMD has no concern that PC sales are going to drop in the second half of the year,” Moon stated Aug. 5.
“The company raised its revenue outlook for 2020, which had previously been projected to hit 15%, saying, ‘AMD now expects 2020 revenue to grow by approximately 32 percent compared to 2019 driven by strength in PC, gaming and data center products.’”
Doubling your sales projections six months into a fiscal year that’s still got a lot of exciting news ahead of it was all investors needed to gobble up AMD stock. In the month since my article, the company’s share price has risen 41% through Aug. 19.
Advanced Micro Devices shareholders have seen the value of their shares increase by 4,405% over the past five years. If you bet the farm on AMD in August 2015, and still hold, you are sitting on a gold mine. Congrats if that’s you.
For anyone late to the party, here’s why now might not be the best time to jump on the AMD bandwagon.
An Ominous Feeling
I get a free daily newsletter from Medium in my email mailbox each weekday. One of the articles highlighted this morning was from an Australian blogger and business writer, Tim Denning.
Published on July 29, I Sold My Entire Investment Portfolio One Hour Ago, explained there was too much risk in the financial markets. As a result, Denning decided to take his recent gains of 30% off the table, moving his entire portfolio to cash.
We can debate whether this is a wise move until the cows come home. The reality is Denning’s not the first person in recent weeks to wonder about the markets’ frothiness.
Stifel analyst Barry Bannister accurately predicted the S&P 500 would bounce back in late March. Now, Bannister believes the markets are overvalued by 5% to 10%.
“Beginning in mid-June, we saw third quarter risks (prolonged virus damage to jobs and growth, much lower 2021 next-year [earnings per share] vs. consensus), which now lead us to believe the S&P 500 is 5-10% over valued heading into late summer/autumn 2020,” MarketWatch reported Aug. 10.
Bannister concludes his argument by stating that if the S&P 500’s tech-led rally continues into the fall, the risk premium for owning equities will fall significantly, severely reducing their overall attractiveness.
Which brings me to AMD and the wall of worry it’s currently climbing. Doubling in value in the five months since the March lows, every 1% of gains it makes over the next few weeks is going to be harder to come by. If you’re late to the party, it naturally begs the question of why you would buy at $81 and change.
The Risk/Reward Is Skewed Against You
First of all, as I said in my July article, I like AMD stock. I also like Nvidia (NASDAQ:NVDA). If you’ve got a three-to-five year hold, $81 won’t be an expensive entry point. However, it’s not cheap at the moment, something InvestorPlace’s Tim Biggam pointed out in early August.
“The price to sales (P/S) ratio now stands at almost 12 and [is] at the richest multiple in the past 13 years. It is also higher than 89% of the 705 companies in the semiconductor industry, according to Gurufocus,” Biggam wrote on Aug. 3.
“To put it in a different context, AMD stock is up 70% on the year while sales growth is expected to be up 32% in 2020. This means the P/S ratio has more than doubled in that time frame. It also means that further multiple expansion and stock gains will be difficult given the historically rich valuations.”
Given its rich valuation and the real possibility of a market correction in the fall of 5% to 10%, possibly more, if you’re one of the lucky ones who bought below $2 and are still holding, I would consider Tim’s suggestion to take some chips off the table.
If you invested $5,000 in 2015, based on a compound annual growth rate of 20%, you would have to sell just $12,442 of AMD stock out of $224,408 in current market value.
If you haven’t bought just yet, and you have a shorter holding period (one to two years), I’d wait for a better entry point somewhere in the $60s. Don’t let the fear of missing out rule your investment decision.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.