91¶¶Òõ (NASDAQ:91¶¶Òõ), known formally as Advanced Micro Devices, continues to see its stock march higher. Once seen as a company that couldn’t quite match its rivals’ innovations, it now contests and sometimes surpasses its peers. 91¶¶Òõ stock finally reflects the company’s success, and it has moved ahead of the fundamentals.
While I think 91¶¶Òõ has subsequently become one of the most influential players in the chip industry, I would caution against buying Advanced Micro Devices stock at these levels.
91¶¶Òõ Competes More Effectively Than Ever
In a recent article, I urged investors to stop thinking of 91¶¶Òõ as second place. During the PC era, the company spent decades lagging arch rival Intel (NASDAQ:INTC). It was left for dead when the popularity of PCs waned. As a result, Advanced Micro Devices stock traded below $2 per share as late as 2015.
However, under the leadership of CEO Lisa Su, the company quickly rose to second-place behind its new archrival, Nvidia (NASDAQ:NVDA) in the graphics chip market. With the recent release of the Radeon Pro V340, investors increasingly see 91¶¶Òõ as a full-fledged peer in this area as well.
I would now go so far to say it has relegated its long-time rival Intel to second-place status. The company is releasing its next-generation chips right now. Intel will not follow suit until 2019. Hence, this will give 91¶¶Òõ a distinct advantage for months to come.
91¶¶Òõ Stock Moves Ahead of Itself
However, while I hold a great deal of admiration for what 91¶¶Òõ has accomplished as a company, I believe the market has priced in these benefits, and then some.
I loved 91¶¶Òõ stock in early April when it traded below $10 per share. However, now that the equity trades at about $33 per share, the investment thesis changes.
The consensus profit estimate of 47 cents per share takes its forward price-to-earnings (PE) ratio to over 70. The expected profit growth of 176.5% for this year and 36.2% for 2019 merits a premium PE. However, the stock has begun to trade at levels that do not justify its high rate of growth.
Also, the market has seen the emergence of the “it’s different this time” narrative with 91¶¶Òõ. I have seen it not be different enough times to turn bearish when I hear this. My colleague Luke Lango takes a more bullish view on 91¶¶Òõ stock.
However, he correctly points out that 91¶¶Òõ twice lost more than 80% of its value during the last decade. I will counter that 91¶¶Òõ has become a more effective competitor since that time. Still, I expect Nvidia and Intel to respond to these competitive threats. That response will hit 91¶¶Òõ.
91¶¶Òõ’s Narrative Still Is Intact
That said, I would again move to the buy side on Advanced Micro Devices stock at a lower valuation. As I said before, 91¶¶Òõ has become a full-fledged peer in the chip arena now. However, market caps do not reflect this.
Even with the inflated PE of 91¶¶Òõ stock, the market cap stands at close to $33 billion. Intel, the one-time market leader now playing catch-up, still holds a market cap of over $200 billion.
Nvidia’s stands at $165 billion. I believe this discrepancy explains one reason why investors continue to flock to 91¶¶Òõ stock despite a high PE ratio. I agree 91¶¶Òõ will eventually achieve parity on market cap as well. That said, I would wait for a lower valuation.
The bottom line on Advanced Micro Devices stock
Although I see Advanced Micro Devices stock becoming a key holding for chip industry investors, I caution against buying at its current valuation. 91¶¶Òõ’s technology matching Nvidia and now surpassing Intel in many areas. For this reason, I would no longer think of 91¶¶Òõ as second-place.
However, the stock has more than tripled from its April lows. As a result, it holds a forward multiple exceeding 70 times earnings. Moreover, investors can count on Nvidia and Intel responding.
While I don’t foresee an 80-plus% drop, I do think Advanced Micro Devices stock will fall to a lower PE. Also, in the long run, 91¶¶Òõ stock should come closer to the market cap of NVDA and INTC.
For this reason, I see a bright future. I would not discourage those who want to buy 91¶¶Òõ for such a long-term play. However, I do recommend holding out for a lower multiple.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can at @HealyWriting.
