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Advanced Micro Devices: Stretched Valuation Implies Downside Potential

Advanced Micro Devices (AMD), also called AMD, is an innovative American multinational semiconductor corporation that provides computer processors and other technologies for high-performing computing, graphics, gaming, immersive platforms, and data centers.

I am neutral on Advanced Micro Devices as its strong competitive position in its industry, robust growth, and general support from Wall Street analysts are offset by its fairly high valuation multiples. (See Analysts’ Top Stocks on TipRanks)


AMD has hundreds of millions of customers, including Fortune 500 businesses and state-of-the-art research facilities. Giants like Google and Microsoft purchase its chips for running their software. The company is focused on building highly innovative products that improve the way people work, live, and play.

It has made record market share gains over the past three years, attributed to the global historic chip shortage driven by the unprecedented demand for electronic products amidst the supply shortage during the pandemic.

Recent Results

AMD’s third-quarter report showed earnings and revenues that beat analysts’ expectations. The company reported record revenue of $4.31 billion in the third quarter of 2021, up 54% from the previous year. Its adjusted earnings were $0.73 per share versus the expected $0.67, indicating year-over-year growth of 16%.

AMD’s non-GAAP net income for the quarter was $893 million or $0.73 per share, beating expectations of $0.67 a share.

The company has benefited from the surge in electronic product sales as its CPU and graphic chips power PCs, servers, and gaming consoles. Its computing and graphics segments reported revenue of $2.4 billion, indicating an increase of 44% year-over-year.

The company reported $1.9 billion in sales in the Embedded, Enterprise, and Semi-custom segment, which showed 69% growth from the previous year. The increase was attributed to a higher demand of game console manufacturers for Epyc server chips and semi-custom sales.

The company has reported it expects $4.5 billion in revenue in the fourth quarter of 2021. This is higher than the analysts’ expectations of $4.25 billion in the quarter. It also expects 39% annual growth in the fourth quarter of 2021.

Valuation Metrics

AMD’s stock looks richly valued at the moment as its forward enterprise value-to-EBITDA ratio is currently 38.1x compared to its five-year average of 30.4x, and its price-to-normalized earnings ratio is 50.4x compared to its three-year average of 42.7x.

While the multiples are high, the growth prospects are expected to remain pretty strong, with EBITDA expected to grow by 17.7% in 2022 after increasing by 114.7% in 2021, and normalized earnings per share expected to grow by 25.6% in 2022 after rising by 105% in 2021.

Wall Street’s Take

Turning to Wall Street, AMD has a Moderate Buy consensus rating, based on 14 Buys and eight Holds assigned in the past three months. The average Advanced Micro Devices price target of $141.80 implies 10.1% downside potential.

Summary and Conclusion

AMD is a key player in a high-growth industry and has been reaping the benefits in recent years as its growth has been stellar and its stock price has shot up as a result. Furthermore, growth is expected to remain strong moving forward, and Wall Street analysts are generally bullish on shares as well.

That said, the stock’s valuation looks a bit stretched here as AMD is trading above historical multiples, and the consensus price target implies some downside from here over the next year. As a result, investors might want to wait for a pullback in the share price.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >