Advanced Micro Devices (NASDAQ:AMD) is a great company, but stock traders should consider waiting for AMD’s valuation to cool down a bit before jumping into the trade. I am neutral on AMD stock and hope to catch it at lower price points for a confident buy-and-hold this year.
Advanced Micro Devices (which people typically refer to as AMD) is one of the most important microprocessor manufacturers in the U.S. The company has made mincemeat out of Intel (NASDAQ:INTC) in the semiconductor space, stealing much of Intel’s market share and earning the industry’s respect with best-in-class microchips.
As we’ll discuss in a moment, AMD is even starting to make waves (with the help of a famous tech giant) in the artificial intelligence (AI) hardware market. The problem is that the market is highly efficient and appears to have priced in all good news related to AMD and perhaps even some future good news that hasn’t actually happened yet. Hence, while it’s fine to believe in AMD as a company, it may be prudent to try timing your entry, which requires patience that some of today’s traders might not possess.
AMD Stock Flies High Despite Lackluster Quarterly Results
Whereas Intel stock has chopped around and basically gone nowhere, AMD stock has formed a series of what technical experts call higher lows and higher highs. That’s really just a fancy way of saying that AMD has stair-stepped higher, and undoubtedly some folks will see this as strongly-bullish price action.
Yet, value-focused investors should stop for a moment and consider whether AMD stock should have rallied so sharply. Less than a month ago, Northland analyst Gus Richard raised his price target on AMD shares to $81, and Truist analyst William Stein upped his price target on the stock to $84.
Already, AMD stock has blown past those two price objectives. It closed above $108 today and is currently near $117 in after-hours trading after Nvidia (NASDAQ:NVDA) raised its guidance (AMD is rallying in “sympathy”). This occurred even though AMD’s Q1-2023 revenue and earnings per share were only moderately above the consensus estimate. Furthermore, AMD’s current-quarter revenue forecast of $5 billion to $5.6 billion was softer than Wall Street’s call for $5.5 billion.
As we’ll touch upon shortly, analysts generally expect AMD stock to pull back slightly. This doesn’t mean it’s a great idea to short-sell the stock, as hype and momentum can carry it higher this year. Just be aware that the stock may have gotten ahead of itself, as AMD’s GAAP trailing 12-month price-to-earnings (P/E) ratio of 455.24x is substantially higher than the sector median P/E ratio of 23.99x, and its non-GAAP P/E of 35.9x is also much higher than the sector median of 18.2x.
AMD Jumps Headfirst Into AI Hardware with Microsoft’s Help
It’s already well-established that AMD makes fast, powerful microprocessors. For instance, the company’s latest release of Ryzen 7020 C-Series processors could hurt AMD’s competition. Let’s be honest, though — today’s investors want to hear about AI. So, how is AMD addressing the red-hot AI hardware market in 2023?
AMD is developing robust supercomputers and has scheduled an AI-focused livestream for June 13, but those aren’t the headline stories here. The most significant news is that AMD is receiving support from none other than technology titan Microsoft (NASDAQ:MSFT) in its pursuit of leading-edge AI hardware products.
By “support,” I mean that Microsoft will work with AMD “on a homegrown Microsoft processor for AI workloads, code-named Athena,” according to a Bloomberg report via Reuters. Not only that, but Microsoft will reportedly provide “financial support to bolster AMD’s efforts.”
Needless to say, it’s a huge win for AMD to get operational and financial support from Microsoft. Still, this doesn’t necessarily mean AMD will succeed in taking market share in the AI hardware field. Even with Microsoft in its corner, AMD could fall behind as it’s certainly not the first entrant in the AI hardware arms race of 2023.
Is AMD Stock a Buy, According to Analysts?
Turning to Wall Street, AMD stock comes in as a Moderate Buy based on 18 Buys and eight Hold ratings. Nonetheless, the average Advanced Micro Devices stock price target is $99.35, implying 8.2% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell AMD stock, the most accurate analyst covering the stock (on a one-year timeframe) is Matt Ramsay of TD Cowen, with an average return of 58.14% per rating and an 86% success rate. See below.
Conclusion: Exercise Patience
With Microsoft’s backing, AMD could generate robust revenue from AI-targeted hardware. Yet, this remains to be seen. Additionally, AMD’s disappointing current-quarter revenue guidance indicates that the company’s shares may be overvalued at the moment.
If Wall Street is right, AMD stock only has so much gas left in the tank and is due for a pullback. That would be fine, as a share-price dip of 10% or so would present a great opportunity to consider a buy-and-hold position, in my opinion.
