The Choice: Ask Why or Just Buy Advanced Micro Devices
At this point, why ask why seems to be what investors are thinking when it comes to Advanced Micro Devices (NASDAQ:AMD)? AMD stock is expensive, but it’s nearly impossible to bet against the stock continuing to climb. That’s not particular insightful analysis but with a market that’s going up based on a lot less, Advanced Micro Devices is providing something tangible: rising revenue and profits.
Source: flowgraph / Shutterstock.com
I’ll take that any day.
Advanced Micro Devices has been firing on all cylinders since last year.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
And despite the pandemic, the company continues to deliver.
If you want to talk about gaming, data centers, electric vehicles, Advanced Micro Devices has a product that is probably leading the market. Josh Enomoto even threw in cryptocurrencies as a catalyst which I had forgotten about. But okay, add that log to the fire as well.
And while my conservative nature tends to agree with Enomoto when he cautions that growth may not be as easy, I still think AMD stock is a buy at the moment. That being said …
AMD Stock Is Expensive
The investment advisory firm Mott Capital Management recently wrote a cautionary article about AMD stock in Seeking Alpha. The author describes the premium that is being applied to the company’s stock:
AMD already trades with a P/E multiple of nearly 40 times 2022 earnings estimates and nearly 8 times 2022 sales estimates. That is to start. It gets worse, trading for 29.7 times EV/EBITDA, 37.6 times free cash flow, and price to book at 13.
And yet, the company is entering into an all-stock acquisition of Xilinx (NASDAQ:XLNX). However because of AMD’s lofty valuation, Mark Hake wrote in October that the $30 billion dollar deal “won’t be too dilutive to existing shareholders.” This is because according to Hake, AMD stock may be expensive but people expect it to rise further.
Not Part of the Problem
Many investors have a skittishness about stocks like AMD stock that have a lofty valuation. That’s a reality of 2020. For better, and sometimes for worse, valuations have been kicked to the curb. Investors with more time on their hands have taken to do more trading. And they’re playing to win.
I’m all for healthy competition. And as much as I may shake my head at the “gamefication” of stocks, the Robinhood investors have gotten it right occasionally.
But when valuations become separated from reality, everybody loses. That’s because as Larry Sullivan pointed out, you have investors who would love to buy AMD stock on the dip, but that dip may not happen.
However, in the case of AMD stock, I think the current stock price, as lofty as it is, is justified.
A Contrarian Thought
In an attempt to offer a balanced perspective, I see that one analyst, Gus Richard of Northland, believes that the calendar year (CY) 2021 estimate for Advanced Micro Devices is too high. Says Richard, “We normally model to be in-line with consensus but can’t get there in the case of our AMD’s CY21 estimates. It may be the case we have a faulty assumption but we still can’t find it.”
I’ll take the opposite view of Richard’s argument, I believe AMD stock will go higher because I can’t find a reason it won’t. My analysis may be based on a faulty assumption, but I still can’t find it.
Pick Your Price And Buy AMD Stock
I could tell you that the 12-month price target for AMD suggests it may fall by more than 19%. I can tell you that out of the 36 analysts to rate the stock one (not Richard) has given the stock a “sell” rating. If you’re looking for a cause for concern, I’d point once again to that Xilinx deal.
I could write many words of caution. But ultimately price is what you pay, value is what you get. AMD stock is expensive, but it’s earned its lofty valuation and it appears to warrant it.
In conclusion allow me to say that no stock goes up forever. At some point, AMD stock will suffer a correction. But right now there’s no reason to believe that will be anything other than a great buying opportunity.
Right now the company has too many catalysts that look like they will be around for several more quarters to come.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
More From InvestorPlace
The post The Choice: Ask Why or Just Buy Advanced Micro Devices appeared first on InvestorPlace.
