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Why AMD Is Up 92% So Far in 2018

By Nicholas Rossolillo – Updated Nov 18, 2018 at 2:26PM

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It may not feel like it as of late, but it’s been a great year for shareholders.

Since spiking to multiyear highs in late summer, shares of Advanced Micro Devices (AMD -2.44%) have given up over 40% of their value. Though it may not feel like it, the stock has still had a great run the last couple of years. Since the start of 2016, shares are up 580%, including a 92% gain in 2018 year to date.

However, the days of triple-digit advances could be coming to a close for this chipmaker. While AMD successfully dug itself out of a hole over the last few years and continues to innovate with new computing technology, sales momentum is stalling out in dramatic fashion.

2018 in review

AMD is best known for its central processing units (CPUs) and graphics cards (GPUs) -- the former acting as the brains of a computer and the latter rendering images and video. Multiple tailwinds have been filling AMD's sails the last few years, helping the manufacturer find new uses for its products and pulling it out of the red.

Chips for use in traditional applications like desktop and laptop computers and video games have been lifted by a rising tide as technology improves and consumers have upgraded their hardware. Newer developments have also lifted business, like the cryptocurrency boom and cloud computing and data center movements.

A man at a computer holding his head in his hand.

Image source: Getty Images.

However, the torrid pace of AMD's sales growth across its consumer and enterprise product lineup has begun to slow, and 2018 saw the end of the cryptocurrency mining craze. During the third quarter, management relayed that cryptocurrency sales were negligible, compared with sales that made up a high single-digit percentage of total revenue a year ago.

Total revenue and operating income were up 4% and 26%, respectively, during the third quarter. That's nothing to balk at, but the pace is far below the year over year revenue advance of 29% and operating income improvement of 228% AMD booked through the first three quarters of the year (inclusive of the third quarter). The cooldown in expansion explains why the stock has been doused as the year draws to a close.

What's next for AMD?

AMD continues to innovate with new CPU tech for computers and data centers, and GPUs for video games and other graphics applications, though the cryptocurrency boom shows no signs of returning anytime soon. Enterprise solutions, including CPUs for data centers and cloud computing applications, continue to be a bright spot. For the fourth quarter, AMD thinks revenue will increase 8% over a year ago at the midpoint of its guidance, and that profit margins will slightly improve. That could bring some reprieve from the recent tumble.

However, even after the stock's decline in the fall months, AMD is priced at a premium. Its trailing 12-month price-to-earnings ratio (P/E) sits at 68.7, and its 12-month forward P/E at 31.5. That valuation implies the bottom line will more than double in the year ahead.

With momentum slowing down, paying for several decades' worth of expected but not yet realized profits may not be advisable. It's still been a great year for AMD shareholders, but after a huge multiyear run-up, tread lightly with this stock.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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