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How Is AMD’s 2018 Stock Valuation Different from Its 2006 Valuation?

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AMD’s valuation 

Advanced Micro Devices (AMD) is leveraging Intel’s (INTC) headwinds and strong demand environment to gain share in the PC and server CPU (central processing unit) market. This strategy has sent the stock up 148% year-to-date.

AMD witnessed similar growth back in the first quarter of 2016 when its CPU market share was close to that of Intel. AMD’s current growth is different from what it saw in 2006, as it has an advanced manufacturing node and a multigenerational road map, which it did not have in 2006. This is also visible in its stock valuation. A stock is valued using price ratios, which compare its price with fundamentals such as sales and EPS to determine whether it’s adequately valued.

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Price-to-sales ratio in 2006

In the case of AMD, its PS (price-to-sales) ratio is a better measure as its stock is largely influenced by market share and revenue growth. The PS ratio tells us the amount investors are willing to pay per dollar of a company’s sales.

AMD last witnessed growth momentum in the CPU space between the first quarter of 2004 and 2006. During that period, its CPU market share rose from 41.6% to 48.4%, as reported by PassMark, and its PS ratio doubled from 1.6x to 3.2x. On the other hand, Intel’s CPU market share fell from 58.4% to 51.6% while its PS ratio rose from 2.8x to 4.5x, up 60%.

Both companies saw growth in their PS ratios, but the magnitude of the growth varied depending on revenue growth.

PS ratio in 2018

AMD’s CPU growth revived in the first quarter of 2017 with its Ryzen CPUs. Between the first quarter of 2017 and the third quarter of 2018, AMD’s CPU market share rose from 18.1% to 20.9%, and its PS ratio rose from 2.7x to 4.4x, up 65%. On the other hand, Intel’s CPU market share fell from 81.9% to 79.1%, and its PS ratio rose from 2.8x to 3.3x, up 16%.

AMD’s valuation has already reached 4.4x even though the company has not yet gained significant market share, which shows that investors have already priced in future revenue growth based on its market share.

However, this optimism seems to be fading in October. We’ll look into this next.

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