AMD (NASDAQ:AMD) stock has held steady over the past few months. Shares have traded around the $30 per share mark since June. AMD stock continues to sell at a premium to peers such as Nvidia (NASDAQ:NVDA). But is this valuation justified?
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High expectations are baked into the AMD stock price, but the company could have big catalysts on the horizon that could move the stock higher. This is countered by geopolitical risks that are tough to predict. Let’s take a closer look at Advanced Micro Devices stock, and see why it’s tough to make a call on the company’s future performance.
A Closer Look at AMD Stock
As I discussed in my previous AMD stock article, the company has taken significant CPU and GPU market share from rivals Intel (NASDAQ:INTC) and Nvidia. The company’s EPYC line of server processors has been a big success. Since the first quarter of 2018, AMD has nearly tripled their server market share, from 1% to 2.9%.
Beyond servers and GPUs, AMD is making a big return to the mobile graphics card business. In June, AMD announced it would license its intellectual property to Samsung (OTCMKTS:SSNLF) for use in mobile GPUs. This deal will not move the needle in the short-term, but this partnership could grow into a major opportunity for AMD.
The company is still clawing back from revenue declines over the past 12 months. Sales for the quarter ending June 30 were in line with expectations. Revenue was up 20% quarter-over-quarter, but sales remain down 13% year-over-year. GPU sales are still down from the prior year, but have rebounded since the last quarter. Enterprise sales were still down YoY, but up 34% quarter over quarter thanks to the success of the EPYC processor line.
The U.S.-China trade war remains top of mind when discussing risks to AMD stock. As InvestorPlace contributor Tezcan Gecgil wrote on Aug. 28, 30% of AMD’s revenues come from China. The U.S. semiconductor space’s dependence on China could sink the AMD stock price if the trade war continues. The specter of a recession is another reason to take caution before buying Advanced Micro Devices stock. Additional pullbacks in chip demand could threaten the stock’s current valuation.
Despite these risks, the stock continues to be “priced for perfection.” Let’s take a look at the valuation of AMD stock and see how it stacks up to peers.
AMD Stock Remains Overvalued
AMD has a lot of potential. This explains why Advanced Micro Devices stock continues to trade at a substantial premium to peers. AMD stock currently trades at a forward price-to-earnings (forward P/E) ratio of 29.8. The company’s enterprise value/EBITDA (EV/EBITDA) ratio is 65.6.
Compare this to Nvidia: Nvidia stock trades at a forward P/E of 23.6, and an EV/EBITDA ratio of 35.4. Intel trades at an even more modest valuation. Intel shares trade at a forward P/E of 10.5, and an EV/EBITDA ratio of 6.8.
But this valuation discrepancy could be justified. AMD has room to grow. Intel is struggling to maintain its dominant market share in the server chip space. AMD has gotten the best of Nvidia in the GPU sphere.
However, with the macro risks in the chip space, it’s tough to stomach the rich valuation of AMD stock. Piper Jaffray analyst Harsh Kumar agrees. He believes the company’s growth potential is countered by the high valuation and geopolitical risks. These risks are not going away anytime soon. If these risks accelerate, they could have a material negative impact on the AMD stock price.
Bottom Line: AMD Overvalued, but Could Climb Higher
I remain bearish on AMD stock. The company has pulled off a massive turnaround in the past five years, but investors getting into stock today should not expect the big returns investors have seen in prior years. AMD’s next earnings release is in late October. Between now and then, shares likely will trade at the same price level, barring any significant market moves. The continuation of the U.S.-China trade war could have additional impact.
If AMD beats expectations for the next quarter, shares could climb higher. Although the valuation is rich, future performance is what investors at looking at with regards to AMD stock. So what’s the call? In my opinion, all bets are off. Investors are not getting a value play buying Advanced Micro Devices stock. Investors who succeed in “predicting the unpredictable” could win if the AMD stock price rallies further up. But for those who want to play it safe, there are clearer growth opportunities out there.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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