Is it Too Late to Buy AMD Stock?

Chip manufacturer Advanced Micro Devices (NASDAQ:AMD) is one of several companies that has received a massive boost this year as investors aggressively bought tech stocks with AI connections. As a major manufacturer of graphics processing units (GPUs) and high-speed server chips, AMD is a key supplier of the hardware that will be needed to power the growth of generative AI. 

With the stock up nearly 63 percent YTD, investors who bought AMD’s dip at the end of 2022 have already seen strong returns on their investments. So, is it too late to buy AMD stock?

AMD Revenue Falls 18% Year-over-Year

In Q2, AMD reported revenue of $5.36 billion, down 18 percent from the same period in 2022. Gross profit tracked closely, coming in down 19 percent to $2.44 billion. Operating income dropped even more drastically from the previous year.

In Q2 2022, AMD reported operating income of $526 million. In the most recent quarter, however, the company fell into the red with an operating loss of $20 million. Net income encountered similar headwinds, falling 94 percent from $447 million to $27 million.

The recent pitfalls, however, don’t paint the full picture of AMD’s otherwise meteoric growth. Full-year revenue has increased from slightly under $4 billion as recently as 2015 to $23.6 billion in 2022. During the same period, the company also drastically improved its gross margins from about 27 percent to well over 40 percent. 

AMD is also showing early signs of a turnaround in its business performance. While Q2’s results were a far cry from those of a year ago, they were a substantial improvement over Q1. Compared to the first quarter, operating income rose 86 percent, gross profit rose 4 percent and net income rose 119 percent. 

AMD appears to be in a reasonably strong growth position. Over the next five years, analysts expect average annual earnings growth of roughly 30 percent. This reflects both higher demand for AMD’s server processing components and ongoing growth in the GPU segment.

Analysts Forecast More Upside for AMD Stock

Even after rising more than 60 percent YTD, analyst forecasts suggest that AMD may still have more room to run.

Analysts’ consensus 12-month target price for the stock is $145, a 37.5 percent increase from the most recent price.

Wall Street maintains a consensus buy rating on AMD, with 27 of the 46 analysts covering the stock offering a buy rating. Notably, no analysts currently rate AMD lower than a hold.

From a value investing perspective, AMD’s extremely high pricing multiples make it far from attractive. The stock trades at 18.5 times cash flow, 38.5 times projected forward earnings and 7.8 times sales. Perhaps the most troubling valuation metric, however, is AMD’s price-to-earnings-growth ratio of 4.2.

Traditionally, a PEG of over 2.0 indicates significant overvaluation. In AMD’s case, this could suggest that even the potentially strong growth period ahead may not justify the price investors are paying for the stock.

Will A Falling Tide Sink All Boats?

The most obvious short-term risk factor for AMD investors is the potential for a market-driven price correction. Although management has been quite successful in building the underlying business, even a moderate interruption in growth could call the stock’s sky-high valuation into question and put downward pressure on prices. 

A related risk from the potential of cooler investor sentiment on AI stocks. Already, there are signs of reduced momentum among AI-focused stocks that could indicate the bubble around generative AI is beginning to burst. This trend tracks rather well with AMD’s recent share price performance, as the stock has actually declined by nearly 5 percent in the last month.

AMD also faces intense competitive pressure, particularly from NVIDIA. According to market research published earlier this year, NVIDIA commands an 84 percent share of the GPU market. This compared to just 12 percent for AMD.

Given that the GPU market is expected to expand at a compounded annual rate of 33.5 percent through 2030, NVIDIA’s overwhelming dominance could deprive AMD of an otherwise very attractive growth opportunity. 

Is AMD Still a Good Buy?

AMD stock presents an interesting mix of positives and negatives. As noted above, the company’s long-term revenue growth has been nothing short of spectacular. Despite the challenges of the past year, management appears to be in the early stages of turning the company’s negative trajectory around. As such, AMD seems to have decent potential as a long-term growth business.

It’s worth noting that AMD’s balance sheet is quite strong, giving the company ample room to continue investing in new research and development. In addition to a debt-to-equity ratio of just 0.03, the company has $3.84 billion in cash and equivalents that it can deploy for future growth initiatives.

Another bright spot for the company is its increasingly large presence in the server CPU space. By Q4 of last year, AMD had achieved a 30 percent share in this market. Intel, AMD’s only meaningful competitor in this space at the moment, still held a 68.7 percent market share. While Intel is introducing new processing technology in an attempt to block AMD and maintain its dominance, the trend at the moment appears to be strongly in AMD’s favor. 

On the downside, however, the stock’s extremely high pricing leaves very little room for missteps on management’s part. The potential for lower AI enthusiasm among investors may also bring AMD’s multiples back down to earth.

Given that prices have been declining in recent weeks, there’s at least an argument to be made that AMD may have peaked for the time being. 

Ultimately, AMD may be a good buy for highly risk-tolerant investors who are bullish on AI. For most other investors, however, the stock’s current pricing likely introduces too much risk of loss. AMD appears to be an excellent company with strong growth potential, but it will have to continue posting massive growth to justify its sky-high stock prices.

More conservative investors may want to hold off on AMD for the time being. Future market corrections, however, could offer better opportunities to buy in at a more reasonable price.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.