Some investors rely on historical performance trends to predict future capital returns. They may point to Advanced Micro Devices’ (NASDAQ:AMD) poor average monthly returns in October as an indicator to avoid the semiconductor giant this month. And they may miss out on lucrative long-term gains in AMD stock.
AMD stock lost about 7% of its value in September. Shares underperformed both the NASDAQ 100 Index (up 0.1%) and the broader S&P 500 Index’s 3.4% decline during the period. If history were to repeat itself, the company’s share price could weaken again in October, but this looks increasingly unlikely.
Historical Monthly Returns on AMD Stock
Over the past five years, shares in Advanced Micro Devices have historically had their worst average monthly returns in October.
AMD’s five-year average monthly return for October is a 7% loss. The best average monthly returns were recorded in July (18.4% average gain) followed by November’s average monthly return of 15.6% over the last five years.
However, investors may wish to avoid making investment decisions based on any financial security’s historical performance entirely.
AMD stock’s historically poor returns in October were mainly influenced by an unusual 41% decline in its share price in October 2018. In that year, even the S&P 500 had a tough month, registering a 6.9% monthly decline.
Actually, 2018 was historically an unusually bad year for the stock market, the worst since 2008. Unless one is predicting a 2018 type market volatility, seasonality readings influenced outlier years have poor predictive power to influence any investment decisions.
Interestingly though, if we stretch our research period to 20 years, October remains the worst month for AMD, with average monthly loss of 6.7% followed by September’s average 4.7% decline. One is tempted to conclude that October is a notorious month for capital losses for the fast-growing computer processor and graphics chips manufacturer.
That said, if by any chance the ongoing correction in tech stocks persists in October, long-term investors will welcome an opportunity to buy-the-dip for sizeable capital gains in the next decade.
4 Strong Reasons to Buy AMD Stock in October
There are several ongoing developments specific to the company’s business that should help investors decide on whether to buy or avoid AMD stock in October. Here are some to consider right now.
A Serial Winner in a Key Datacenter Market
News on Sept. 30 was that AMD has expanded its collaboration with a key customer, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud, in delivering faster and cost-efficient performance using the company’s record-breaking high-performance processors.
AMD’s third-generation EPYC™ 7003 Series processors are taking the data center and high-performance market by storm. They continue to trounce the competition by obscenely wide margins for the fourth year in a row. I am looking at you Intel (NASDAQ:INTC) and your Xeon offerings.
It’s true that AMD is fast gaining market share in the high-margin server processor vertical. It continues to shame Intel in the data center space, and I believe company CEO Lisa Su feels no remorse about it.
With each new generation, the EPYC family processors continue to beat the prior record-breaking performance levels. In a recent product launch presentation, the company claimed its latest EPYC processor chip offered a 98% better performance per processor core than Intel’s best. Here’s a faster, cheaper, and more cost-efficient competitor and the potential killer of Intel’s Xeon.
Actually, customers seem to agree. AMD reportedly increased its premium server PC processor market share in the segment from 5.8% during the second quarter of 2020 to 9.5% by June this year.
Google claims to achieve 30% better price-performance with AMD’s latest high-end processors. If this doesn’t make other cloud computing giants move to AMD, I don’t know what will.
Customer demand for the latest AMD offerings has been extremely strong. The company is nudging at a large competitor and an industry behemoth that generates nearly six times its current annual revenue, and the underdog is actually winning the war.
Rapid Growth Rates Surpassing Management Expectations
AMD is currently growing so fast that its management has increased its revenue guidance twice in two earnings announcements in 2021.
Second-quarter revenue almost doubled year-over-year to a record $3.85 billion after a 99% annual growth. In January, management had an initial sales growth forecast of 37% year-over-year for 2021. It upgraded it to 50% in April, only to increase the annual guidance again to 60% year-on-year by the end of July.
Sales have grown at blazing hot rates, even during a period of severe chip shortages. One can only imagine how much faster the company could grow once the global supply-chain bottlenecks clear up.
A Potential Earnings Surprise in October
The company is expected to release its third-quarter results late this month. Management guided for third-quarter revenue of $4.1 billion. Analysts expect the company to report exactly that number.
However, management has been a bit too conservative with their guidance lately. Both first quarter and second quarter management revenue guidance came in about 7% to 8% short of actual results.
One could speculate on another revenue and earnings beat is in store for October’s earnings release. Shares could respond positively to a positive surprise – unless if the market already expects one.
Valuation Has Normalized
One more thing, AMD stock’s valuation has normalized back to historical averages. Shares are no longer as expensive as they had become during a Covid-19 pandemic-related tech stock rally of 2020.
Thanks to recent rapid growth, earnings and cash flow-based valuation multiples have normalized back to their late 2018 levels.
The company’s forward enterprise value-to-EBITDA, market-capitalization-to-free-cash-flow, and price-to-normalized-earnings multiples currently trend below their historical three year averages. Actually, the free cash flow and earnings multiples are so close to their three-year lows right now.
Shares in AMD are no longer as expensive as they had gone in 2020, and you can buy them cheaper now.
Investors may want to closely watch AMD stock in October. If shares continue to fall this month, long-term investors will get another opportunity to buy the dip on a winning play for another shot at outsized long-term gains.
The company has finally found a rare growth formula. AMD is experiencing one of its best days since going public in 1972 and it’s literally stealing Intel’s cheese quarter after quarter. I am bullish on its long term returns prospects
On the date of publication, Brian Paradza 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.
Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.