One of the most gratifying feelings as an investor is to see your buy thesis for any given stock come to fruition. But given the happy consequence of share-price appreciation that tends to come with this type of situation, you might be left wondering whether it would be wise to take profits off the table.
So we asked three top Motley Fool contributors to weigh in on what investors should think about three popular high-flying stocks. Read on to learn what they had to say about Advanced Micro Devices (AMD 5.55%), Veeva Systems (VEEV 1.61%), and Tesla (TSLA 4.72%).
Any missteps could badly hurt this graphics chip specialist
Steve Symington (Advanced Micro Devices): Shares of AMD have soared nearly 400% over the past year as of this writing, and with good reason. After losing significant graphics card market share to competitor NVIDIA from late 2014 through the middle of 2015, AMD gradually regained its footing to end 2016 with market share of roughly 29.5% (up from 21.6% at the start of the year). Most recently, AMD investors are rightly excited over the prospects for the impending launch of high-end cards based on the chipmaker's Vega GPU architecture.
But given its meteoric rise, I'm not the only one worried that AMD's stock price may have gotten ahead of the actual business. Earlier this month, shares declined after Goldman Sachs initiated coverage on AMD with a sell rating and $11-per-share price target (the current price is around $13), arguing that AMD's remaining market-share gains are limited, and that both NVIDIA and Intel have the flexibility to reduce their own chip prices in an effort to stem AMD's progress, if necessary. The GPU market also tends to ebb and flow given the combination of upgrade cycles and continuous innovation in the space. So investors shouldn't underestimate the ability of AMD's competitors to claw back what they've lost over the past year with their own new technology.
But more concerning is the fact that AMD still isn't profitable, delivering a GAAP net loss of $497 million last year and an adjusted (non-GAAP) net loss of $117 million -- albeit narrowed from 2015 GAAP and adjusted losses of $660 million and $419 million, respectively. So if AMD suffers any hiccups this year as it strives to maintain its momentum and return to sustained, profitable growth, I fear its stock price will give back the recent gains in a hurry.
Veeva has been on a tear, but how long will it last?
Brian Stoffel (Veeva Systems): Veeva Systems has found a very profitable niche. The company, which is the brainchild of its founder-CEO and former salesforce.com executive, Peter Gassner, offers cloud solutions to drug companies. These solutions can do everything from tracking sales of certain drugs to storing and sharing mission-critical information during the drug approval process.
Shareholders have been rewarded handsomely for their faith in Gassner and company, with the stock up 140% since February of last year. But that has put the company in nosebleed-valuation territory. Currently, shares trade hands for 69 times non-GAAP earnings and 51 times free cash flow.
When stocks have this type of valuation, the slightest worry can send shares down. And in fact, there are a number of things that investors need to be aware of. For starters, Veeva has developed a cloud solution for clients outside of the pharmaceutical industry. I believe part of the run-up in price is associated with high sales expectations for Veeva in this new venture. But this new path is untested, and it remains to be seen how well it will be received in other industries.
Furthermore, Veeva has made it clear that it will be investing aggressively in its future. That means that while sales may continue to grow, profitability may not. In fact, after adjusting their calculations, analysts expect Veeva to show non-GAAP EPS growth of only 8% this year. That's not typically what you'd expect from such an expensive stock.
But, as a long-term shareholder, I am unconcerned. I am well-aware that Veeva's stock may fall in the short term. That is the nature of its industry. Over the long run, however, I have faith in the company's moat and its undeniable business momentum.
Don't hit the brakes on this stock
Dan Caplinger (Tesla): Tesla has gotten headlines lately because investors have assigned a valuation on the company that exceeds those of the much more mature Big Three automakers. Just since the beginning of 2017, Tesla is up 40%, yet the company is nowhere near being profitable. The stock price implies a multiple to trailing sales of 7, and skeptics believe that there's little chance that Tesla can ramp up quickly enough to justify its current valuation even as the mass-market Model 3 approaches its anticipated release date later this year and starts to deliver on the roughly 400,000 preorders that the new car company has gotten for the lower-end Tesla car.
Tesla has a number of growth prospects in its pipeline that it hopes will allow it to maximize its potential. On the solar front, Tesla has released new solar panels that it claims have more attractive designs to entice homeowners into using them on their homes. Meanwhile, the automaker also foresees entering the commercial transportation arena, with a heavy-duty truck and transit alternatives that could take advantage of Tesla technology for non-consumer purposes. None of this is to say that Tesla isn't richly valued and potentially vulnerable to a decline, but people have been predicting that Tesla would see an outright crash for a long time without having succeeded. Betting against Tesla right now is likely a mistake.