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AMD at $80: Buy, Hold, or Sell?

By Harsh Chauhan – Oct 26, 2020 at 10:36AM

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The chipmaker has been on fire this year.

Advanced Micro Devices (AMD 0.32%) stock has been in top form in the market in 2020, rising to a new all-time high at the end of August to more than $90 a share thanks to terrific momentum across its different businesses.

But the last two months haven't been great for the chipmaker -- AMD stock is down nearly 13% since the beginning of September and is now trading at around $80 a share. Should investors treat this as an opportunity to buy more shares of this high-flying (if volatile) tech stock, or book their profits to avoid the possibility of more downside?

AMD Chart

AMD data by YCharts

AMD is about to get a nice shot in the arm

AMD's top and bottom lines have gained impressive momentum over the past year.

AMD Revenue (TTM) Chart

AMD Revenue (TTM) data by YCharts

The chipmaker has been taking away market share from Intel in central processing units (CPUs), giving NVIDIA a hard time in graphics cards, and is reportedly exploring new territories to become a dominant semiconductor player. Not surprisingly, AMD's financial performance has been terrific of late despite the novel coronavirus pandemic.

The company's revenue was up 26% year over year in the second quarter of 2020, and net income had jumped to $0.18 per share from $0.08 in the prior-year period. The third-quarter guidance was even better, with AMD forecasting 42% year-over-year revenue growth, attributing the acceleration to strong demand for its Ryzen and EPYC processors, as well as a bump in sales of its semi-custom processors thanks to the arrival of a new generation of gaming consoles.

For the full year, AMD expects 32% revenue growth over 2019 levels, citing "strength in PC, gaming and data center products." The company looks on track to sustain this impressive momentum in 2021 as well, and it is not hard to see why.

The enterprise, embedded, and semi-custom (EESC) business, for instance, is about to take off as new gaming consoles from Sony and Microsoft are equipped with AMD's chips. Sony believes that it can sell more than 7 million PlayStation 5 units by April 2021 and outpace the initial sales performance of the PlayStation 4. Meanwhile, the Xbox Series X is expected to top the PS5 in terms of sales this holiday season, according to another estimate.

Hands holding folding selector that reads buy, hold, sell, and the dollar sign

Image source: Getty Images.

The new consoles should act as a multi-year catalyst for AMD's semi-custom business, as the previous generation consoles sold over 150 million units since launching toward the end of 2013. On the other hand, AMD's EPYC server processors have been helping the company offset the recent weakness in EESC.

AMD has been taking away share from Intel in the server processor market as well, with several big names adopting its chips. The chipmaker is about to make life harder for Intel in this space, as it is on track to launch a new generation of server processors based on the Zen 3 microarchitecture. Rumors indicate that the new processors could be 20% faster than their predecessors, which could pave the way for more gains in the server market for AMD.

The EESC business accounted for just over 29% of its total revenue last quarter, but its performance was nothing to write home about. Revenue from this segment was down 4.4% year over year in the second quarter, while operating income shrank to $33 million from $89 million in the prior-year period.

So a turnaround in EESC should lift the company's overall financial performance, as it will add to the tailwinds seen in the computing and graphics business, which accounts for the remainder of its revenue.

A hefty valuation

AMD's sunny prospects are likely to encourage investors looking for a top growth stock to take advantage of the recent pullback and buy it. But those who have missed the gravy train so far might want to take a step back and contemplate if it is a good idea to buy such an expensive stock.

AMD has a trailing price-to-earnings (P/E) ratio of more than 150, while the forward earnings multiple of 47 isn't cheap either. The stock trades at 12.2 times sales, much higher than the five-year average price-to-sales ratio of 3.9. So, AMD is not a stock for those with a low appetite for risk.

However, investors willing to pay the huge premium for AMD's terrific growth might end up enjoying more upside. The company is busy refreshing its product lineup, having launched new Ryzen 5000 CPUs already, while its next-generation graphics cards and server processors are on the way. AMD could sustain its high growth rates, assuming its new products replicate the success of its predecessors and continue to take away market share from rivals.

That's why existing shareholders can continue holding AMD in their portfolios despite an expensive valuation, or even buy more stock depending on their risk profile, as it isn't done growing yet.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and NVIDIA. The Motley Fool recommends Intel and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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