AMD Stock Price Has Paused, Investors Should Pause As Well
Advanced Micro Devices, Inc. (NASDAQ:AMD) has paused after an impressive summer run-up. Trading below $10 for a time in April, the AMD stock surged in late spring and through the summer.
However, ever since reaching the mid-$30s per share range, a series of events have caused the AMD stock price to pause. Given its tech strides, AMD remains a long-term play. Still, with the stock price moving ahead of itself, investors should stay away in the short term.
Surge Exceeded Expectations
Back in April, I was bullish on AMD as the decline in its crypto niche hammered the stock, pushing the AMD stock price briefly into the single-digits. Despite the negative sentiment, analysts had predicted massive profit growth. I told readers to buy thinking the stock would go up. Go up it did.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
The surge in AMD stock exceeded even my expectations. Between April and September, it rose from a low of $9.04 per share to as high as $34.14 per share, a 277% increase. In that time, investors quickly forgot the decline in the crypto niche. Competitive gains on Nvidia (NASDAQ:NVDA) helped. Turmoil with its long-time archrival Intel (NASDAQ:INTC) boosted the stock even more. The word that Intel would not release its next-gen chip until next year served to further AMD’s competitive advantage.
However, since reaching that mid-30’s high on Sept. 13, the stock has stagnated. Tariff concerns have weighed on the entire sector recently. Also, Intel just announced that its chip supply would allow the company to meet the demand for the remainder of 2018. AMD had hoped to fill that gap.
Current Valuation Seems High
Still, I think that many of the concerns hinge on the valuation itself. When I recommended the stock in April, the forward price-to-earnings (PE) ratio had fallen below 23. Today, that same forward PE has risen to around 65x. Given the strides it has made against its major peers, it may well deserve a PE above S&P 500 index averages. The 2018 expected profit growth rate of 176.5% may well have fueled the stock.
Still, at a 65 multiple, we get to the ranges where the market has to price AMD stock for perfection. Analysts expect 42.6% profit growth next year. Such a number constitutes high growth by just about any measure. That said, I have to wonder whether it justifies its current PE.
Long-term Outlook Remains Promising
Despite the concerns, I still like AMD stock long-term. CEO Lisa Su inherited a company that traded below $2 per share as late as 2015. Under her leadership, the company has turned around. After decades of playing second fiddle to Intel, AMD has now morphed into a full-fledged rival in its own right. I think it will match, and in some areas, surpass its rivals from a technological perspective going forward.
Also, AMD holds a market cap of about $30 billion. Despite Intel’s struggles, its market cap stands at about $218 billion. Nvidia has grown into a $170 billion company. Over time, AMD should move closer to parity with its main rivals.
However, the short-term profits from this stock are likely exhausted at this stage. We should receive further guidance when the company releases its quarterly report on Oct. 23. Still, from what we know now, the stock needs to pause or pull back modestly so the company’s financials can catch up.
Bottom Line on AMD Stock
Investors should stay away from AMD stock for now as its share price trades well beyond company fundamentals. AMD has enjoyed a fantastic comeback.
Left for dead in 2015, it has caught up and — in some areas — surpassed its main rivals. Unfortunately for prospective buyers, Wall Street has long since taken notice. Now, with a price above $30 per share, much of the value proposition has disappeared.
Still, investors should continue to watch AMD. The stock has moved ahead of itself, but the firm’s fundamentals remain strong. I also believe it will someday achieve a market cap comparable to where Nvidia and Intel trade today. We should learn more from the Oct. 23 earnings release. However, if one can buy AMD stock at a low or even a moderate valuation, I think they will see impressive long-term profits.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
More From InvestorPlace
The post AMD Stock Price Has Paused, Investors Should Pause As Well appeared first on InvestorPlace.
