I have always had mixed feelings about Advanced Micro Devices (NASDAQ:AMD). In April 2020, I said the pandemic sell-off created “the best opportunity investors are going to have to get into AMD stock.” But even then, I was only lukewarm on AMD.
Since that time, AMD stock is up another 1,310%. Most of the reasons I liked the stock at the time are still valid. Most of the reasons I was skeptical of its valuation are too.
If you’re buying AMD stock today, there are plenty of things to like about its long-term outlook. There are also a lot of risks.
AMD Stock Pros
AMD stock gives investors exposure to some of the biggest long-term growth markets in the tech sector. Under the leadership of CEO Lisa Su, AMD has somehow gained a technological edge over its competitors, most notably Intel (NASDAQ:INTC).
AMD recently reported its seventh-straight quarter of double-digit revenue growth. Its PC, server and gaming businesses are booming. AMD chips are in the latest generation of both PlayStation and Xbox gaming consoles. AMD GPUs help power Tesla (NASDAQ:TSLA) electric vehicles.
The company recently raised its 2021 full-year revenue growth guidance to 60% from 50%. Business is booming.
Even after the big run by AMD stock, Bank of America (NYSE:BAC) analyst Vivek Arya says there is more upside ahead. Arya is projecting AMD will capture about 20% share of the $66 billion PC and Server microprocessor market by 2023. That market share expansion could boost AMD’s earnings per share to the $5 range.
“We estimate that AMD has claimed ~60% of the incremental sales growth in PC + Server MPU over the last three years, an acceleration from the 40% incremental share in the trailing 5-yr period. AMD is exposed to attractive, duopolistic compute markets with limited exposure to more cyclical smartphone, memory, autos/industrial demand,” Arya recently told clients.
In addition, it doesn’t seem Intel is in a position to stop AMD anytime soon. AMD is on track to launch its 5-nanometer Genoa chips sometime in mid-2022. Intel is expected to launch its 7-nanometer Sapphire Rapids chips at around the same time. In other words, AMD is on track to remain one generation ahead.
BofA’s Arya has a “buy” rating and $135 price target for AMD stock.
AMD Stock Cons
At this point, I believe the AMD stock valuation is by far the biggest risk to owning the stock. AMD bull Arya is projecting $3.24 in 2022 EPS. That projection means AMD stock is already trading at more than 32 times bullish 2022 earnings estimates. Where’s the upside?
AMD stock trades at 9.4x sales, 50.9x free cash flow and 18.5x book value. Those numbers aren’t necessarily through the roof, but they certainly don’t suggest significant additional upside.
Meanwhile, there’s an 800-pound gorilla in the room that may be standing between AMD and Arya’s long-term target of $5 per share earnings. I think it’s fair to say that gaining back its technology edge is priority number one for Intel.
Intel is likely pouring all available resources into reclaiming its throne as the chip leader. Sure, that money and scale hasn’t done them much good in recent years. But Intel generated a whopping $20.9 billion in net income in 2020 compared to just $2.5 billion for AMD.
Investors should never write off that large of a resource advantage. Intel will be coming hard for AMD in the next couple of years. Just one slip-up by AMD or one breakthrough by Intel could completely derail the long-term AMD growth story.
How To Play It
In recent weeks, AMD stock has taken over as one of the most popular social media meme stocks. I think it’s completely unfair that such an impressive growth company is lumped in with meme stocks like AMC Entertainment (NYSE:AMC), GameStop (NYSE:GME) and other high-debt businesses in secular decline.
Still, if you’re looking to buy and hold a meme stock for the long-term, AMD is one of the best. I’m not thrilled with the current valuation. But investors should feel good about buying the stock on any major dips. Just make sure to keep a eye on what Intel is up to.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.