Even a global pandemic couldn’t slow down the market for chipsets — or the bullish sentiment surrounding Advanced Micro Devices (NASDAQ:AMD) – for long. If you need evidence of this, check out the trajectory of AMD stock.
You see, AMD stock didn’t exactly double in 2020, but it came pretty close. There’s simply no denying that the bulls were fully in charge of the price action.
Not long ago, I issued a bullish recommendation on AMD stock. To back up my position, I pointed out the company’s highly impressive third-quarter revenue growth. But now I’m wondering, is it possible for a company to maintain such a robust growth rate?
Moreover, should prospective investors be concerned about the current valuation of AMD stock? We’ll explore these burning questions and more, but let’s start with a brief technical analysis.
A Closer Look at AMD Stock
Would you believe that AMD stock started off 2020 at the $49 level? It’s shocking but true, and so is the fact that the stock fell as low as $36.75 at one point during the year.
As it turned out, the buyers rushed in and bid up the AMD share price during the second half of 2020. On the final trading day of the year, AMD stock settled at an astounding $91.71.
Yet, there’s something even more astounding: AMD’s valuation. Currently, AMD stock’s trailing 12-month price-to-earnings ratio stands at a lofty 124.27.
Don’t get me wrong — I certainly wouldn’t expect AMD stock’s P/E ratio to be in the 20’s or 30’s after such a massive share-price run-up.
Nonetheless, value-focused investors are justified in expressing dismay over the valuation of these shares. Hence, I wouldn’t blame anyone for sitting on the sidelines and waiting for some of the air to be let out of the balloon, so to speak.
A Differing Opinion
It seems like everyone on Wall Street has an opinion on semiconductor stocks. And from what I’ve found, opinions lean toward the bullish.
For the analyst community, high P/E ratios don’t seem to be a source of concern lately. Mainly, they’re focused on the company’s growth prospects.
I’ll give you an example. Analysts from Mizuho Securities recently issued a slew of price target hikes for companies involved in the semiconductor space.
Among those companies, as you might expect, was Advanced Micro Devices. Mizuho hiked its price target on AMD stock to $102 from $93 while announcing a “buy” rating for the stock.
In defense of this, Mizuho analyst Vijay Rakesh generally predicted “strong year-over-year momentum and tailwinds from a supportive fundamental and macroeconomic backdrop” for the semiconductor industry.
Note the Competition
So again, the bullish argument centers not on value, but on momentum. If your thesis is that big companies will only get bigger in 2021, then perhaps a long position in AMD stock could make sense.
The potential problem here is that other companies aren’t just going to stand by idly and let Advanced Micro Devices dominate the market.
You might assume that I’m referring to rival chipmaker Intel (NASDAQ:INTC), and you’d be right. Yet, Intel isn’t the only major threat nowadays, as other famous tech names are now building their own advanced chipsets.
These include Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB).
Those companies have deep capital reserves and brand-name recognition. Even beyond the fierce competition from Intel, AMD will have to fend off a growing pool of powerful rivals.
The Bottom Line
There’s still a lot to like about Advanced Micro Devices. The company offers powerful tech products and remains a dominant force in the market.
Still, value-oriented investors are justified in their concerns about AMD stock. Could the company and the stock continue growing at such a rapid pace? Maybe, but not everyone’s willing to bet their investing capital on that.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
