Advanced Micro Devices (NASDAQ:AMD) may have picked the wrong week to deliver a stellar earnings report. Although the company beat analysts’ average estimates on the top and bottom lines (again), AMD stock still fell rather sharply in the wake of the results. The stock is down nearly 10% since the company reported its earnings on Jan. 26.
There was nothing in the company’s presentation that should have given investors pause. Its revenue and gross margin were up significantly on a year-over-year basis. And AMD has a strong and growing war chest, with $2.29 billion in cash, cash equivalents and short-term investments.
Was AMD Stock Caught Up in the Squeeze?
It seems the drop in the company’s stock was due to profit-taking. Some of the profit-taking, in turn, may have been due to institutional investors having to cover their shorts of GameStop (NYSE:GME) stock.
In the wake of the short squeezes triggered by retail investors, the stock prices of a number of quality stocks, such as Apple (NASDAQ:AAPL) and Tesla (NASDAQ:(TSLA)), fell approximately 7%. The stocks of other top-notch companies like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) dropped around 3.5% for the week.
And there may also be a sense that AMD is fairly valued at its current price. InvestorPlace columnist Mark Hake took that view heading into the company’s earnings.
As Hake pointed out, AMD stock was recently trading for approximately 47 times analysts’ average 2021 earnings per share (EPS) estimate. If the company meets that estimate, its EPS will have climbed over 45% this year.
But that was before AMD stock took its nearly 10% haircut.
More Fun With Statistics
Based on analysts’ average estimates, AMD stock does look overvalued. According to MarketBeat, 32 analysts have a mean 12-month price target of $87.47 on the shares. However, when I took a closer look, I found that the price targets of analysts who have issued opinions on the stock recently tend to be much higher.
Since the beginning of the year, 13 of 32 analysts have changed their price targets on AMD stock. Of those 13, 12 increased their price targets to at least $84. The average price target of those 12 analysts was $110.
Ten of the 13 analysts who raised their price targets this year did so after the company’s earnings report. That suggests that they liked AMD’s results.
A Well-Positioned Company
However the counter argument is that the stock’s rally simply enabled it to reflect its actual value. Like every stock, Advanced Micro Devices was punished significantly at the onset of the pandemic. It took the shares a few months just to reclaim their pre-pandemic levels.
And unlike stocks in other sectors, there was no obvious reason why AMD stock dropped as much as it did. With AMD obtaining significant revenue from gaming, the work-from-home trend, cryptocurrency mining and data centers, the company was positioned to benefit from all the markets that were strengthening.
And as investors look ahead to 2021 and beyond, AMD is well-positioned in areas like electric vehicles and autonomous driving, which is still years away. Plus, in an effort to help reduce carbon emissions. the company has been at the forefront of designing products that are more energy-efficient.
Use the Decline of AMD Stock as a Buying Opportunity
It’s a challenging time to be an investor. There is a sense that the other shoe will drop on this market, but nobody knows exactly when. However, quality stocks historically rise to the top of the market. And AMD appears to be a quality name.
Is the stock priced for perfection? Maybe it is, but if there’s one thing AMD has been good at recently, it’s jumping over relatively high hurdles. There’s nothing in the company’s recent earnings report which suggests that will change anytime soon.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.