The bottom line is that at $89.45 per share as of Jan. 19, AMD traded for 49 times 2021 earnings and over 8.7 times sales. That is simply too high for investors looking for a bargain stock.
Moreover, investors may be taking this point into consideration. The stock has fallen 3.8% this year so far. Moreover, in the last month, AMD stock is down more than 9%. However, in the past year, it spiked 81% plus. This is the main reason why the stock may have gone too far too fast.
Valuation Issues With AMD
Granted, there seems to be plenty of justification for this high valuation. For one, earnings this year are forecast to grow more than 45% to $1.80 per share, according to analysts surveyed by Seeking Alpha.
In fact, further out-year forecasts show EPS growth will be 34% in 2022 and 7% in 2o23. By then EPS is forecast to hit $2.59 per share.
That lowers the forward year price-to-earnings (P/E) ratio to 34.5 times at the price of $89.45. But this is still very high for most investors. A lot of things have to go right.
For example, keep in mind that lower valuation is for earnings three years in the future. For all intents and purposes that is just an educated guess. It’s not as if earnings for Advanced Micro Devices are highly recurring and can be easily forecast out that far.
In other words, there is a high degree of risk in these out-year numbers. Granted, they likely include the combined earnings for the company’s latest acquisitions, including Xilinx (NASDAQ:XLNX). I wrote about the benefits of that all-stock acquisition in my previous article on AMD stock. That deal should close any day now.
What Analysts Say About AMD Stock
In my previous article, I wrote about the Financial Times article analyzing the AMD acquisition of Xilinx. So far, I believe this is the best analysis I have seen on the structure and purpose of the deal.
The deal shows that Advanced Micro Devices is one of the long-term winners as a chip supplier for data centers. The article points out that data centers are essentially what is known as “the cloud” for us laypeople.
AMD and Xilinx are at the forefront of where the action is in terms of who really needs and buys large amounts of semiconductor chips. This includes data centers and other users of neural networks that use FPGA chips that act as accelerators for “deep learning.” Neural networks are necessary for artificial intelligence (AI) applications in various industries. This is the cutting edge of software development these days.
So, in a way, you can see why the stock is so highly-priced. But again, this euphoria is already mostly in the stock price already.
Most analysts do not see much upside in AMD stock, in terms of price targets. Marketbeat.com says that 35 analysts have an average price target of $82.09. That is more than 8% below the Jan. 19 price.
In addition, TipRanks.com reports that 23 analysts have a consensus price target of $96.55. That is an upside of about 8%. Yahoo Finance says that 23 analysts have a lower price target of $93.03.
Averaging all three of these reports leaves us with a price target of $90.55. AMD stock closed at $89.45 on Jan. 19. In other words, the stock is fully valued, especially for value investors who typically look for a bargain stock.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.