Why AMD Stock Appears Overvalued

+2.21%
Upside
160
Market
163
Trefis
AMD: Advanced Micro Devices logo
AMD
Advanced Micro Devices

Advanced Micro Devices stock (NASDAQ: AMD) has gained about 50% year-to-date, considerably outperforming the broader S&P 500. So what’s driving the recent surge in the stock? Firstly, technology stocks in general have fared well, with inflation easing and the Federal Reserve moderating the pace of its interest rate hikes. The Nasdaq-100 is up by roughly 15% year-to-date. AMD also posted a stronger-than-expected set of Q4 2022 results. Overall revenues grew by about 16% year-over-year to about $5.6 billion, driven primarily by strong growth in the data center segment which saw sales of EPYC server processors surge, helping to offset a sharp decline in PC processor sales. Moreover, following the success of OpenAI’s generative AI tool ChatGPT, major tech players appear to be doubling down on the artificial intelligence space. Now AI workloads are computationally very heavy and this could drive demand for areas such as accelerated computing and this has apparently turned investor attention back to chip stocks.

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Now is AMD stock still a buy at the current market price of about $98 per share? While there are a couple of tailwinds for the stock, we think AMD’s valuation at the current juncture appears a bit rich. AMD stock trades at about 32x consensus 2023 earnings. Moreover, the company’s top line is likely to see little to no growth this year amid continued pressure on the client side of the business. For example, IDC anticipates that PC sales will drop by 10.7% this year to 260.8 million units, a downward revision from its previous forecast.  Longer-term growth in the PC market is also likely to remain muted, with growth between 2023 and 2027 projected at an average annual rate of 2.9%. [1] While the data center market is likely to grow strongly this year, growth rates are likely to cool off, as big corporations cut back on spending, amid a tough economic environment. Moreover, while AMD has a strong presence in the GPU space, its rival Nvidia’s chips are generally perceived to be more advanced and capable, when it comes to AI-related workloads.  This could limit the upside for the company in the AI market. We value AMD stock at about $72 per share, which is about 25% below the current market price. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.

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Returns Mar 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 AMD Return 25% 51% 763%
 S&P 500 Return -3% 0% 72%
 Trefis Multi-Strategy Portfolio -4% 3% 224%

[1] Month-to-date and year-to-date as of 3/18/2023
[2] Cumulative total returns since the end of 2016

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Notes:
  1. IDC []