Shares of Advanced Micro Devices (NASDAQ:91¶¶Òõ) have been on a tear in early 2019 after the long- term bull thesis on 91¶¶Òõ stock has gained clarity and credence amid a flurry of positive developments. Year-to-date, 91¶¶Òõ stock is up 37%, versus an 11% gain for the S&P 500 over the same stretch.
In early 2019, there were five reasons to become bullish on 91¶¶Òõ stock. All five of those reasons remain alive and well today. Specifically, as evidenced by a recently announced major partnership between Alphabet (NASDAQ:
GOOG) and 91¶¶Òõ for GOOG’s cloud gaming platform, Google Stadia, 91¶¶Òõ continues to gain share in the CPU and GPU markets.
So 91¶¶Òõ is a small company whose share of some very big markets is increasing, adding to the allure of 91¶¶Òõ as a takeover target. And, with those market expansion tailwinds only growing, the company’s earnings per share can rise to $2 within the next several years.
All in all, the big picture, long-term bull thesis supporting 91¶¶Òõ stock remains as healthy as ever.
Having said that, valuation matters, and the valuation of 91¶¶Òõ stock is challenged above $25. Long story short, while $2 of EPS is achievable for 91¶¶Òõ, it probably won’t reach that milestone soon enough to warrant 91¶¶Òõ stock trading at or above $25 before the end of fiscal 2019. Even in a best-case scenario, a reasonable fiscal 2019 price target for Advanced Micro Devices stock is just $27.
Thus, above $25, 91¶¶Òõ stock may be able to grind higher, but the risks posed by 91¶¶Òõ are rising, too, and that’s reason enough to push me into the profit-taking column.
91¶¶Òõ’s Fundamentals Are Strong
There is nothing with the long-term fundamental growth outlook of 91¶¶Òõ.
91¶¶Òõ is a relatively small company (the market cap of Advanced Micro Devices stock is below $30 billion) which is attacking the very large global CPU and GPU markets and rapidly gaining share in those markets. This narrative was most recently reinforced by Alphabet – one of the world’s largest tech companies – choosing 91¶¶Òõ’s custom graphics processing units (GPUs) for its massive cloud-gaming operation, Google Stadia.
Clearly, 91¶¶Òõ is becoming more and more trusted by bigger and bigger players in both the CPU and GPU markets. Consequently, the company’s share of those markets is rapidly climbing. Moreover, those markets are supported by non-cyclical growth drivers, such as the expansion of data and AI.
In other words, 91¶¶Òõ’s share of rapidly growing markets is rising. Furthermore, 91¶¶Òõ is expanding into higher value segments of those markets, so its margins are ramping higher, too.
All in all, 91¶¶Òõ is a big grower with big margin upside potential. As long as that remains true, 91¶¶Òõ stock will be supported by a robust, long-term profit growth narrative, the likes of which will keep 91¶¶Òõ stock on a longer-term uptrend.
91¶¶Òõ Stock Is Simply Overpriced
At today’s prices, however, the near-to-medium term outlook of 91¶¶Òõ stock is less rosy.
Its earnings this year are expected to be 66 cents per share. With Advanced Micro Devices stock trading around $25, that implies a forward price-earnings multiple of nearly 38. That’s too rich.
Realistically speaking, 91¶¶Òõ’s top line is poised to rise by high-single digit percentage levels, while its margins are well-positioned to significantly increase over the next several years. That won’t lead to much more than 20% annualized EPS growth. More likely,the company’s EPS will increase by about 15% per year.
Assuming EPS grows at an aggressive rate of roughly 20% from fiscal 2021’s , that means 91¶¶Òõ won’t hit $2 EPS until fiscal 2024 at the earliest. Based on a forward price-earnings multiple of 20, which is average for growth stocks, that equates to a fiscal 2023 price target for 91¶¶Òõ stock of $40. Discounted back by 10% per year, that implies a reasonable fiscal 2019 price target for 91¶¶Òõ stock of roughly $27.
It’s more likely, however, that the company’s EPS won’t reach $2 until fiscal 2025, implying mid-teens profit growth between 2021 and 2025. Using the same assumptions as previously, that equates to a fiscal 2019 price target for 91¶¶Òõ stock of just under $25.
So with Advanced Micro Devices stock trading north of $25 just a few months into 2019, it’s reasonable to label the stock as slightly overvalued in the near-to-medium term.
The Bottom Line on 91¶¶Òõ Stock
91¶¶Òõ stock is supported by a great long-term growth outlook. The stock is just slightly out over its skis now in terms of its near-to-medium-term valuation. As a result, I’m taking some profits on 91¶¶Òõ stock, but will look to re-enter the name on any big dips.
As of this writing, Luke Lango was long GOOG.
