Advanced Micro Devices (NASDAQ:AMD) stock has been red hot for several years now, as the CPU and GPU maker has leveraged superior innovation to develop competitive advantages and grow market share in the global semiconductor industry. Importantly, the AMD stock rally has shown no signs of cooling down.
Throughout 2016 and 2017, AMD stock rallied 260%. Shares rose another 80% in 2018, and another 150% in 2019. Year-to-date, the stock is up another 100%.
In other words, AMD stock has essentially been a triple-digit annualized gainer for about five years now. At this point, it’s reasonable to ask: Will the rally ever stop? Yes. And I think quite soon. But not before the stock takes out the $100 levels.
Extended Valuation and AMD Stock
When it comes to AMD stock, two ostensibly opposing truths are simultaneously true.
One, AMD will continue to expand global CPU/GPU market share over the next several years, powering sustained enormous revenue and profit growth into 2030. Something to the tune of 10%-plus revenue growth and 15%-plus profit growth is totally doable.
Two, AMD stock is fully priced for all that big growth to happen. My modeling — which bakes in some fairly aggressive long-term growth assumptions — implies that AMD stock is worth somewhere between $70 and $90 today.
After all, at a $110 billion valuation, AMD is being valued at more than 50% of Intel (NASDAQ:INTC), yet AMD’s trailing revenue base is less than 10% that of Intel’s trailing revenue base.
Yes, I get that AMD is growing by leaps and bounds while Intel is not. But even when you take it account the next 10 years and assume AMD sustains huge growth, $90-plus prices on AMD stock are tough to justify today.
To that end, I think it’s safe to say that AMD stock is fundamentally extended at current levels.
Favorable Near-Term Growth Drivers
A little bit of valuation friction probably won’t be enough to derail the AMD stock rally. At least not any time soon.
AMD has some sizable near-term growth catalysts on the horizon which will be more than enough to offset minor valuation headwinds.
First, there’s 5G. Over the next few quarters, the global standardization of 5G will lead to supercharged growth in all things semiconductor, and act as a huge tailwind for this whole industry, AMD included.
Second, there’s Ryzen. AMD’s next-gen PC processors continue to steal market share from Intel, at a time when PC demand should soar thanks to 5G advancements. Thus, AMD projects to sell a lot of Ryzen processors over the next few quarters.
Third, there’s EPYC. AMD’s next-gen data center processors also continue to steal server market share from Intel, at a time when cloud demand will roar higher thanks to 5G, work-form-home and virtualization tailwinds.
Fourth, there’s the Playstation 5 and Xbox Series — the two next-gen gaming consoles, both of which are outfitted with semi-custom AMD processors and both of which project to launch to blockbuster demand this holiday season.
Fifth, there’s the low rates backdrop. The U.S. Federal Reserve cut rates to zero early on during the Covid-19 crisis, and has since maintained a stance that rates will remain near-zero for a lot longer.
This has dragged down the risk-free return rate in financial markets, thereby dragging down the implied cost of equity and inflating all stock prices, especially growth stock prices.
Against this low-rate backdrop, it’s tough to see the AMD stock rally fading out — especially so long as the company executes strongly against its huge growth opportunities.
Bottom Line on AMD Stock
I think it’s definitely time to reduce bullishness on AMD stock, and adopt some more caution, simply given larger-than-ever valuation headwinds.
But it’s not time to go bearish yet.
The stock is barely overvalued, and the backdrop is just too good right now for minor valuation headwinds to derail the rally. So stick with the rally. Let AMD stock take out the $100 level. Then reconsider things.
Until then, stay with this winner.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did own a position in any of the aforementioned securities.