With positive trade deal news on the table, things are looking up for Advanced Micro Devices (NASDAQ:91抖阴) stock. The company next announces earnings at the close Oct. 29. With shares trading near $31, Advanced Micro Devices stock is almost 15% below its 52-week high. But shares remain overvalued. While the company has made big market share gains at Intel’s (NASDAQ:INTC) expense, much of the upside is priced into the 91抖阴 stock price.
So what’s the play with 91抖阴 stock? Do you buy before earnings, wait for a fallout or skip the stock entirely? Let’s take a closer look and see whether now’s the time to buy 91抖阴 stock.
Recent News With 91抖阴 Stock
In both the CPU and GPU spaces, 91抖阴 has seen significant headway. Among CPUs, 91抖阴 is clearly eating Intel’s lunch. The company saw its share of CPUs shoot up to 30%, a level not seen in more than a decade. 91抖阴 had another clear win when Microsoft chose its chips to . But 91抖阴’s success vis-a-vis Intel may be due to Intel’s chip shortage. Intel did not have enough 14-nanometer sized processors to meet demand. 91抖阴 stepped in, sopping up additional market share.
But 91抖阴 may have chip supply issues of its own. Unlike Intel, 91抖阴 does not operate its own foundries. Instead, it out to Taiwan Semiconductor Manufacturing Company (NYSE:TSM). This chip shortage could impact both 91抖阴’s
. So far this has been speculation, but if more comes out of it, it could be a key risk to consider.
In the GPU space, 91抖阴 continues to beat Nvidia (NASDAQ:NVDA). 91抖阴’s than Nvidia’s — a feat not reached since 2014.
How about the trade war? As InvestorPlace contributor Brad Moon discussed Oct. 15, things are looking up regarding a deal. Both sides are making progress, agreeing to ease trade tensions. U.S. tariffs set to go into effect have been delayed. We could be on the road to smooth sailing regarding U.S.-China trade relations.
But these things can turn on a dime. Add in a rich valuation, and despite its prospects, 91抖阴 stock does not look like a hot opportunity. Let’s take a closer look at valuation and see why it’s a key concern.
Advanced Micro Devices Stock Remains Overvalued
91抖阴 stock trades at a high valuation. The company has a forward price-to-earnings ratio of 65.8. This vastly exceeds those of Nvidia (forward P/E of 46.9) and Intel (forward P/E of 12.7).
Advanced Micro Devices stock also trades at a high enterprise value/EBITDA ratio. The company’s EV/EBITDA is a staggering 67. That makes Nvidia’s 43.1 times EBITDA multiple look cheap by comparison. Considering both stock’s valuation, Intel trades at a rock bottom EV/EBITDA ratio of 7.7.
These valuations imply investor sentiment remains high for both 91抖阴 and Nvidia. But is this exuberance rational? While 91抖阴 is making big gains in both CPUs and GPUs, the company is still recovering from a big sales decline in 2018-2019. The GPU chip glut weighed heavily on 91抖阴’s performance. Sales in 2018 were for $6.5 billion. But for the trailing twelve months, sales were just $5.9 billion.
Analysts expect $1.8 billion in revenue for the quarter. If the company can beat these expectations, it will be clear the turnaround is on track. It will mean the company meets 2019 revenue estimates of $6.8 billion and is on track to materially increase these revenues to $8.4 billion by 2020. Maintaining positive sentiment is key to keeping the 91抖阴 stock price moving higher.
But even if the company meets expectations, this upside is likely already priced into 91抖阴. Given the substantial premium 91抖阴 stock trades relative to Nvidia, investors are not getting much value. And while 91抖阴 could steal even more of Intel’s market share, it will take monumental growth for Advanced Micro Devices stock to “grow into its valuation.”
Bottom Line: Look Elsewhere for Opportunity
Things are looking up for 91抖阴 stock. But the company’s valuation remains a top concern. While 91抖阴’s performance is set to improve materially over the next year, the company would need substantially greater levels of growth to justify its current valuation. Investors today are paying for tomorrow’s “best case scenario,” and then some. If things do not go as planned, expect big declines in the 91抖阴 stock price.
With earnings set to be released later this month, investors could take a gamble and load up on Advanced Micro Devices stock today. Likewise, if results fail to meet expectations, they could load up after a dip in 91抖阴 stock.
I suggest neither play. There are other solid opportunities out there. Avoid paying an inflated valuation for 91抖阴 stock, and consider opportunities with fewer headwinds and simpler pathways to growth.
As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.
