In a sharp and sudden reversal that many had been warning about for weeks, the market’s biggest winners in 2020 – tech stocks – fell off a cliff heading into Labor Day weekend. Advanced Micro Devices (NASDAQ:AMD) stock, which has been one of the hottest tech stocks this year, rising as much as 100% year-to-date, was no exception to the trend.
In a matter of three days, AMD stock dropped as much as 20%.
This sell-off in AMD stock and in the broader tech stocks is nothing to worry about.
The reality is that nothing is wrong with tech stocks besides the fact that they rallied too much. For months, these stocks could do no wrong. They kept pushing higher and higher and higher, to more and more extreme valuations. Eventually, gravity kicked in, and the result is a rapid sell-off in tech stocks to more reasonable valuation levels.
They’ll get to those more reasonable valuation levels. Soon. When they do, the sell-off will end, and the longer-term rally will resume, because the fundamentals underlying tech stocks remain as robust ever. That is, technology continues to disrupt every facet of our daily and professional lives, at an accelerated pace today because of Covid-19, and these companies’ influence, revenues and profits will only go way higher over the next five to 10 years.
So, use recent weakness to buy high-quality tech stocks at discounted prices.
AMD is, without question, one of the highest quality tech stocks out there today. Also, thanks to the recent sell-off, the valuation is once again tangible.
Buy the dip.
Semiconductor Boom
Although semiconductor stocks have all plunged over the past few days, nothing has changed about the very attractive growth fundamentals underlying this sector.
Specifically, it still looks very likely that we will get a semiconductor boom over the next 12-plus months.
In late 2020, the introduction of a 5G iPhone will cause a swell in semiconductor demand and pave the path for global 5G coverage standardization in 2021. That will, in turn, boost semiconductor demand to power a new era of 5G smart devices, as such devices go from niche to norm.
Meanwhile, also in late 2020, the Xbox Series X from Microsoft (NASDAQ:MSFT) and PlayStation 5 from Sony (NYSE:SNE) will both launch, providing a big boost for GPU demand globally. A rumored Nintendo (OTCMKTS:NYDOY) Switch 2 launch for 2021 will only further boost global GPU demand.
A permanent shift to hybrid work environments globally will sustain robust cloud computing demand (and cloud computing architecture is, of course, built on semiconductor chips), while 5G will spark advancements in edge computing and push us materially forward on the self-driving front, which will also boost global semiconductor demand as investment in AV tech ramps up with these advancements.
Net net, the fundamentals underlying the semiconductor market today could not be better. Over the next 12-plus months, this industry projects to enter a growth renaissance, the likes of which we haven’t seen in years.
Against that favorable backdrop, semiconductor stocks, including AMD stock, will rally.
AMD Is the Best-in-Breed Option
AMD is currently the best-in-breed player in the CPU/GPU market.
That’s because AMD is ahead of everyone else on the innovation curve, launching and scaling production of next-generation 7-nanometer chips while its biggest competitor, Intel (NASDAQ:INTC), won’t get to 7-nanometer production until 2022.
So long as AMD retains this innovative advantage, the company will continue to do what it has done over the past several years: rapidly expand market share.
Rapidly expanding market share in what projects to be a booming semiconductor market implies sustained huge revenue growth for AMD. At the same time, strong demand and increased scale imply continued margin expansion, which means that big revenue growth will turn into bigger profit growth.
It’s tough to see AMD stock faltering for a prolonged period of time so long as profits keep surging higher.
Valuation Now Tangible
The one big knock against AMD stock was valuation. But those valuation headwinds have significantly moderated now that AMD stock has shed 20% from all time highs.
My modeling, which bakes in some fairly aggressive yet reasonable long-term growth assumptions, implies that AMD stock is worth somewhere between $70 and $90 today.
AMD stock shot above the upper range of that valuation range in early September. Now it’s back towards the lower end of the range.
Buy the dip. Hold until it pops back above $90.
Bottom Line on AMD Stock
The recent sell-off in AMD stock has nothing to do with the fundamentals, which remain great. It has everything to do with valuation. Admittedly, AMD stock’s valuation did get ahead of itself.
But, with shares having peeled off 20% in a matter of days, the valuation has corrected itself, and AMD stock is once again reasonably valued.
Now that valuation headwinds are gone, it’s time to buy the dip and let strong fundamentals spark a rebound in the stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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.
