• Both external and company specific factors have resulted in the big drop in Advanced Micro Devices (AMD) stock.
• While the plunge happened fairly quickly, a recovery may take much longer to play out.
• That said, if you’ve been looking to make this a long-term holding in your portfolio, now may be a great time to buy.

Source: Ascannio/Shutterstock

No longer flying high, there’s a lot weighing on Advanced Micro Devices (NASDAQ:AMD) stock right now. Not only due to the fear, uncertainty and doubt (FUD) that is still weighing down the market. Company specific concerns have had a negative impact on the performance of AMD stock as well in recent months.

Given that AMD has fallen more than 46% off its highs in less than six months, this plunge has happened pretty quickly. But that’s not to say a rebound will happen just as fast. Many are waiting for the storms to pass before diving back into this chip maker’s shares.

Having said that, this doesn’t mean you need to “wait and see” alongside the crowd. There are issues it must contend with in the short term, yet its long-term prospects remain bright. With this, investors sitting on the sidelines with AMD stock may want to act now.

AMD Stock and Its Big Drop in Price

During 2020 and 2021, Advanced Micro Devices had a lot on its side. With the pandemic boosting demand, the company crushed it when it came to sales of its CPU and GPU chips. Last year, revenue surged 68%. Earnings-per-share went up 25%.

In turn, AMD stock had a lot on its side during this time. Not only due to strong operating performance. With near-zero interest rates, the market was very favorable to growth stocks. That’s how it zoomed from under $40 per share at the onset of the virus, to as much as $164.46 per share, before the big price drop.

So, what happened here? Many factors played a role in its double-digit drop. High inflation, and the Federal Reserve’s move to raise interest rates, has dampened enthusiasm for growth stocks. As rates rise, market participants are less willing to give growth stocks the high valuations we’ve seen over the past two years.

Along with this, concerns more specific to the company have also had an impact. For example, there’s growing concern that the elevated rates of demand for chips among end-users like personal computers (PCs) and gaming could correct in 2023.

Disappointment Overly Priced into Shares

Again, while the AMD stock plunge happened quickly, it may take time for things to reverse course. Yes, you can argue that multiple compression stemming from rising interest rates has already been factored into its share price.

Instead of trading at a very high forward price-to-earnings (P/E) multiple, Advanced Micro Devices today trades at a more-than-reasonable valuation. Based on 2022 earnings projections, it trades at a forward P/E ratio of 22x today. Unfortunately, this doesn’t mean that a re-rating back to a higher multiple is just around the corner.

With the “wait and see” approach the market’s taking with it now, the company needs to meet/beat expectations for a re-rating to happen. However, there may be a silver lining. It’s possible that the market right now is overestimating the chances of disappointment in the quarters ahead. Although demand growth is set to slow down going into 2023, I would expect a repeat of the “chip glut” that happened in 2018.

Why? Unlike that 2018 “chip glut,” caused by the crypto mining boom and bust, the drivers of today’s elevated demand are far more sustainable. That is, it’s not based on a flash-in-the-pan trend.

The Verdict

Demand among PC and gaming end-users is expected to remain strong. Even as we come out of the pandemic. Hybrid working isn’t going away. The latest gaming consoles are also in the early stage of their respective life-cycles.

Couple that with the possibility that its just-announced acquisition of Pensando will accelerate growth with its data center business. Put it all together, and it’s hard to see its performance do a 180 in the upcoming quarters. Currently earning a “B” rating in my Portfolio Grader, I’ll reiterate that a recovery for shares may not arrive quickly.

Still, this may work in your favor if you’re been looking to accumulate a position. Between now, and whenever the market realizes it has factored-in too much “doom and gloom” into the AMD stock valuation, you have the opportunity to enter a position at a more-than-favorable price.

On the date of publication, Louis Navellier had a long position in AMD. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.