AMD’s stock valuation
In this series, we’ve seen that Advanced Micro Devices (AMD) is set to perform better than its peers NVIDIA (NVDA) and Intel (INTC) in 2019 by gaining market share. AMD is banking on its 7-nm (nanometer) portfolio to give it a competitive advantage over Intel. It is this growth that made investors bullish on AMD’s stock, sending it up more than 20% in just two days.
However, some analysts look at AMD’s valuation and believe that investors have overreacted, as the company’s fundamentals do not support the stock price.
A stock’s PS (price-to-sales) ratio tells us the amount investors are willing to pay for every dollar of the company’s sales. In the previous article, we compared AMD with the likes of Apple and NVIDIA when they were in the midst of multiyear growth. At that time, Apple’s PS ratio more than doubled from 1.72x to above 3.5x, whereas NVIDIA’s PS ratio rose 260% from 6.15x to as high as 16x.
AMD is currently trading at a PS ratio of 3.9x on full-year 2019 revenue guidance of 8% to 9% growth. When we look at the two growth stocks of Apple and NVIDIA, it seems like AMD has the potential to grow further.
A company’s PE ratio tells us the amount investors are willing to pay per dollar of EPS. During NVIDIA’s multiyear growth phase, NVIDIA’s PE ratio rose from 37.2x on July 31, 2016, to 51.0x on January 31, 2018. AMD is currently trading at a PE ratio of 83.07x because it has high leverage that lowers its EPS. Given its PE, some analysts say that AMD is expensive even for a growth stock.
However, the PE ratio is not the right measure for a growth company, as its expenses and leverage are high. Unlike NVIDIA, AMD has emerged from multiyear losses to profits. It will take AMD time to return to higher profit and positive cash flows, as a strong product roadmap has kept its expenses high.
If AMD turns out to be a multiyear growth story, we could see a significant boost in its stock price in 2019 and beyond.
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