Advanced Micro Devices (NASDAQ:AMD) has been put through the wringer. Despite a recent bounce, AMD stock is still down 49% so far this year. While the stock was hitting new highs late last year, it’s been almost all downhill since.
At this point, it’s not necessary to point out that other tech stocks (and the overall market) have suffered as well. More specific to AMD’s peers, Nvidia (NASDAQ:NVDA), Intel (NASDAQ:INTC), Taiwan Semi (NYSE:TSM) and others have fallen considerably.
Statistically, this year’s action has been an anomaly in the stock market. Not only are down years uncommon for the S&P 500, but the significant declines we’ve seen so far this year are in rare company.
That has slammed AMD stock lower, and although that’s painful for investors who already own the stock, it creates an opportunity for buyers.
|AMD||Advanced Micro Devices, Inc.||$73.40|
Too many investors are lazy when it comes to assessing AMD. I know that may sound harsh, but it’s the truth. They’ll look at the stock price from 2016 at sub-$2 prices, look at the 52-week high at $164.42 and simply conclude that “it’s a bubble.” Granted, an 81-fold move does raise an eyebrow. However, there’s a lot more going on here.
At year-end 2015, AMD had ~$4 billion in revenue, gross margin of 27% and net margin of negative 16.2%. That was alongside total long-term debt of $2.23 billion, a free cash flow deficit of $322 million and a net loss of $660 million.
No wonder shares were trading at less than $2 and AMD had a market cap of $2.27 billion.
Fast-forward six years to the year-end 2021.
- Revenue: $16.4 billion
- Gross margin: 48.25%
- Net margin: 19.24%
- Total debt: $313 million
- Free cash flow: $3.2 billion
- Net income: $3.16 billion
Some of these figures are fluctuating or will fluctuate due to the company’s acquisition of Xilinx. On its own, Xilinx was free-cash-flowing $1 billion a year and was a value-add acquisition for AMD.
AMD bears can nitpick certain details of the situation, but the reality is that CEO Lisa Su & Co. have done a fantastic job at turning this company around.
AMD Stock Is Becoming a Bargain
At $160-plus, it was easy to argue that AMD stock had momentum, but hard to argue that it had value. When the stock was trading at its all-time high on Nov. 30, consensus estimates called for earnings of $3.32 a share.
I think it’s worth pointing out that those estimates have only gone up between now and then, despite a bear market in tech and a halving in AMD’s stock price. However, at the high shares were trading for almost 50x 2022 earnings. Looking at the stock now, it trades at 20x 2022 earnings estimates.
The reason for the stunning valuation drop is two-fold: The share price has come tumbling lower, but also, estimates have climbed from $3.32 a share up to $4.34 a share. That’s more than a 30% increase in earnings expectations!
Analysts expect revenue of $26.2 billion this year, a big 60% boost from 2021 thanks to the Xilinx deal. But revenue is still forecast to grow ~15% a year through 2025, all while analysts have been way too conservative with AMD’s growth.
Earnings are in a similar situation too. Forecasts call for profit of $4.34 a share in 2022 and profit of $6.90 a share in 2025. If AMD were to stay at the same valuation of 20 times earnings and earning $6.90 a share in 2025, we’re talking about a share price of $138, or a 63% increase in 30 to 36 months.
Where to Buy AMD Stock
I already feel that AMD stock is at a level that warrants an accumulation strategy — such as a dollar-cost-average (DCA) approach.
However, just because I — or anyone for that matter — believes that a stock is trading at a reasonable price, doesn’t mean it can’t or won’t continue to be sold. If investors are trying to time AMD stock for a potentially better cost basis, there are a couple levels that really stand out to me.
The first is the $73 to $75 area, which was strong support when AMD was trapped between $75 and $100. AMD eventually broke out over $100 and this area was support until the second quarter of 2022. Now the stock is sitting in this prior range support level.
If it continues even lower, the 200-week moving average and the 78.6% retracement are on my radar as potential “add spots.”
As much as I like AMD stock (and for that matter, Nvidia too), there’s no denying that these stocks are in downtrends at the moment. Should they break down further, opportunistic investors now have the key levels to watch.
On the date of publication, Bret Kenwell held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.