Up 1.5x This Year, Is AMD’s Rally Coming To An End?

by Trefis Team
-7.19%
Downside
78.06
Market
72.44
Trefis
AMD
AMD
Rate   |   votes   |   Share

Despite an almost 80% rise since the March low of this year, at the current price of around $69 per share we believe Advanced Micro Devices stock (NASDAQ: AMD) has reached its near term potential. AMD stock has rallied from $39 to $69 off its recent bottom compared to the S&P which moved 44%. On the way down, AMD stock had taken a beating of around 34% going from $59 to $39, as much as the S&P 500, which also fell by about 34%. Further, the stock is up a strong 575% from its early 2018 levels, two years ago.

AMD stock jumped to a level higher than that before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

AMD stock rose almost 7x over the last 2 years, despite a meager 12% change in the revenue per share, as a 28% rise in revenue was weighed down by a 15% increase in the outstanding share count.

While the company has seen revenue rise 28% over recent years, its P/S (price-to-sales) multiple has jumped more than 5x, from 2x to 11x currently. Despite this, we believe the stock is unlikely to see significant further upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 575% Change in Advanced Micro Devices Stock between 2017 and now? has the underlying numbers.

AMD primarily manufactures GPU chipsets used in gaming processors and other computing devices. Over the past 2 years, AMD has seen a rise in profitability, with EPS going from -$0.03 in FY 2017 to $0.31 in FY 2019. This has largely been due to the new Radeon and Ryzen processors, which are also expected to carry the company’s business in coming years. Further, AMD’s biggest rival, Intel, recently announced that their 7-nanometer chips won’t be out before late-2022. Meanwhile, AMD already sells 7-nanometer chips. These factors led to a jump in investor expectations, driving P/S from 2x to 11x. However, there is a potential downside in the near term when we consider the current scenario, and how it could impact the company’s business.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus has meant there is much lower demand for laptops and computing devices right now, with discretionary items just not a priority for people at the moment. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe AMD’s Q2 results later this week will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 11x to around 9x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $54.

For more insights into how AMD compares with Nvidia, another close peer, view our interactive dashboard Nvidia vs. AMD: Does The Stock Price Movement Make Sense?

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!