Advanced Micro Devices' (AMD 1.33%) stock price has soared since it reached a two-year low last October. The semiconductor stock had lost around two-thirds of its value by then as the chip industry experienced a slump. It has since reversed course thanks to growing interest in artificial intelligence (AI).
Since those October 2022 lows, the stock has nearly doubled in value over seven months even amid sluggish chip sales and moves to absorb the Xilinx acquisition into its business. The question investors need to ask now is: With the recent run-up, has AMD's price risen too fast, or can I still profit from the stock at these levels?
The state of AMD stock
Admittedly, one might assume it is too late to buy AMD at a higher price. The stock trades at its highest level since last summer, reversing all the declines over the previous 12 months. Moreover, since the beginning of 2023, AMD stock is up by about 65%.
Like most semiconductor stocks, AMD's performance suffered after the pandemic frontloaded considerable growth in 2020 and 2021. That drop also seemed to negate the positive effects that its competitive gains over the likes of Intel and Nvidia (NVDA 3.71%) would have otherwise given the stock.
However, investors should pay closer attention to its price-to-sales (P/S) ratio, which has now risen to 8, up from 4 in January. At that level, it remains far below pandemic highs but is well above where it sold before the pandemic. That sales multiple is also comparable to where AMD traded at the beginning of the pandemic, and it is much cheaper than Nvidia, which currently sells for 29 times sales. Such factors may persuade more investors to consider AMD despite the recent rise in the stock price.
AMD PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
AMD's Q1 report
Something that might dissuade investors from buying AMD is its most recent earnings report. In the first quarter of 2023, revenue of $5.4 billion declined 9% versus the year-ago quarter, a dramatic drop from the yearly growth of 44% in 2022.
AMD's segment performance shows the extent of its challenges. Client revenue, which was its largest segment one year ago, fell 65% over the one-year period to $739 million amid a dramatic drop in PC demand. Also, gaming revenue fell 6% as that industry faces a continued slump; though, at $1.76 billion in revenue, gaming is now AMD's largest segment.
Furthermore, data center revenue grew less than 1% year over year to just under $1.3 billion, a massive decline from Q4 when year-over-year growth was 42%. It is also somewhat concerning as AMD's ability to compete in the AI revolution will depend on the processors powering the data center business.
The bright spot was embedded revenue, which grew 163% year over year. Still, that growth came in large part from its Xilinx acquisition, which exponentially increased the size of AMD's embedded business and boosted AMD's overall revenue. Unfortunately for AMD, operating expenses increased over that time, resulting in a $139 million net loss. In Q1 2022, AMD earned $786 million.
Also, the Q2 outlook estimates $5.3 billion in revenue at the midpoint. Although that should closely match Q1 revenue levels, it would represent a 19% decline on a yearly basis. Such numbers indicate that AMD's struggles will continue for now.
Should I consider AMD now?
Amid declining revenue and a rising stock price, it is probably "too late" to buy in the near term. The massive climb in 2023 has dramatically increased its valuation, and the Q2 outlook indicates revenue declines will continue for now. That could dampen enthusiasm for the stock, causing it to fall short term.
Still, AMD continues to look strong from a long-term perspective, and investors should watch the stock closely. Should AMD enter correction territory, investors should consider adding shares.
