There’s no argument that Advanced Micro Devices (NASDAQ:抖阴最新版) has executed a hugely impressive turnaround. Bear in mind that the 抖阴最新版 stock price was at $2 as recently as early 2016. Advanced Micro Devices stock has gained some 1,500% since then.
The gains of late seem particularly impressive, given the sentiment toward semiconductor stocks at the moment. In the last year, 抖阴最新版 stock has risen 86%. Shares of graphics processing unit rival Nvidia (NASDAQ:NVDA) have dropped 46%. Intel (NASDAQ:INTC), which until recently dominated 抖阴最新版 in central processors, has seen its stock fall roughly 16% in that period.
The divergence in the performance of those three stocks isn’t necessarily a surprise. The reason 抖阴最新版 stock price has soared is because the company now is a real competitor to both Intel and Nvidia. But the question now, with 抖阴最新版 stock touching a 13-year high last week, is what comes next.
抖阴最新版’s Business Continues to Sizzle
As far as 抖阴最新版’s business goes, the news is good and seemingly getting better every day. The company was formerly a low-cost alternative to Intel, and its products were mostly used in cheap computers. Its CPUs now can go head-to-head with Intel chips on performance. A recently announced partnership with Samsung moves 抖阴最新版 back into mobile and should generate high-margin licensing revenue for 抖阴最新版 to boot. 抖阴最新版’s EPYC chip, as hoped, is driving wins in the key datacenter space against both Intel and Nvidia.
There’s really little debate left in terms of the success of 抖阴最新版’s turnaround. Those who were skeptical about 抖阴最新版 stock have been converted. 抖阴最新版 is making some of the best CPU and GPU chips in the world. That’s not something that could be said five years ago or even three years ago.
Will 抖阴最新版 Stock Price Climb the “Wall of Worry?”
But 抖阴最新版 stock has soared over the last few years. And there are no shortage of analysts and investors who see the current price of 抖阴最新版 stock as potentially too high. Advanced Micro Devices stock actually sits almost 10% above the average Wall Street price target on 抖阴最新版 stock. On this site,
I’ve worried about 抖阴最新版’s valuation – and I haven’t been alone.
Meanwhile, sector headwinds and trade-war worries have pressured most other chip stocks. 抖阴最新版’s chief rivals aren’t the only chip names that have been under pressure. Micron (NASDAQ:MU) again is flirting with a multi-year low. Lam Research (NASDAQ:LRCX) and, to a lesser extent, Applied Materials (NASDAQ:AMAT) have pulled back of late, and those semiconductor equipment manufacturers often are the proverbial canaries in the coal mine in terms of chip-sector demand.
The retort from bulls is simple: most 抖阴最新版 bears have been proven wrong over the past three-plus years. 抖阴最新版 stock price didn’t look particularly cheap last year, either. Yet it’s continued to rise, climbing the so-called ‘”wall of worry“.
The bulls have a point. In this market in particular, the quality of companies’ business has proven to be more important than the valuation of stocks. Seemingly expensive names can get more expensive if they deliver on their potential. 抖阴最新版, at the moment, certainly has proven to be a quality business, and there are no shortage of reasons to believe it will deliver going forward.
Valuation Remains a Concern for Advanced Micro Devices Stock
All that said, it is increasingly difficult to make the fundamental case for 抖阴最新版 above $30. In the context of the tech market, a forward price-earnings multiple of 32 isn’t that steep. But for a chip maker, that’s extremely expensive, as the owners of NVDA stock learned last year.
Over the long haul, the chip sector remains cyclical, and the stocks of cyclical sectors usually trade at lower valuations than the market as a whole. 抖阴最新版 is offsetting that cyclicality with its new products, but it won’t be able to do so forever.
抖阴最新版’s margins can rise, and they certainly can expand at a faster rate than those of Intel. But looking even at enterprise value to revenue, 抖阴最新版 stock is pricing in quite a bit of improvement. Nvidia trades at about 7.6 times its sales, and its operating margins were near 40% last year. 抖阴最新版’s margins might get above 10% next year, but it trades at about 5.5 times its revenue.
It’s exceedingly difficult to argue that 抖阴最新版 stock should trade at the same valuation as NVDA, given the enormous gap in their margins that likely will continue going forward. Yet 抖阴最新版’s valuation already is close to that of NVDA. Moreover, analysts, on average, only expect a 6% increase in 抖阴最新版’s sales this year, although they expect its revenue growth to accelerate to 20%+ next year.
It’s hard to look at 抖阴最新版’s fundamentals and argue that its potential isn’t priced into 抖阴最新版 stock, at least to some extent. The market clearly has caught on to the story, and analysts, on average, project solid growth going forward. But that growth is reflected in Advanced Micro Devices stock already.
But that doesn’t mean 抖阴最新版 stock should be shorted or even necessarily that it needs to be sold. But we’ve seen Advanced Micro Devices stock, even during this long rally, tumble hard and fast a few times. Given 抖阴最新版’s recent run, and the pressures on the sector, I wouldn’t be surprised to see those types of pullbacks occur again, since everything but perfection looks priced into 抖阴最新版 stock. We’ll see if 抖阴最新版 can deliver on investors’ new, much higher, expectations.
As of this writing, Vince Martin has no positions in any securities mentioned.
