AMD stock continues to reward investors, reaching recently a new high of $49.25 on Friday. The recent rally was caused by price target revisions, expectations regarding AMD, and the company’s presentation at CES 2020.
The last time I wrote about AMD was on December 23 in Why AMD Stock Could Outperform. At the time, I noted some options transactions that imply the stock’s upside of 1.1%–6.5% from its then-price of $44.15. When the market closed on January 3, AMD shares closed at around $48.60, representing an upside of about 10.1% from my recommendation.
However, it seems that after a recent vigorous rally, AMD shares may face some near-term pressure from market bears. In this article, I’ll review the reasons for a recent rally, technical picture, and valuation metrics to see an opportunity to enter into the stock.
What drove recent AMD stock’s run-up?
On December 31, Rosenblatt analyst Hans Mosesmann increased his price target on AMD stock to $65 from $52. Mosesmann maintained the “buy” rating on the stock.
According to TheFly, “Rosenblatt analyst Hans Mosesmann noted that AMD shares are up nearly 147% year-to-date but he views 2020 as a year in which the company will continue its early momentum in CPU share gains and he sees ‘limited competitive threats slowing the momentum’ for the upcoming new 7nm mobile Ryzen chip.”
The report added, “Given that he sees a strong back half of 2020 coming on the early ramp of new game consoles from both Microsoft (MSFT) and Sony (SNE), Mosesmann believes AMD is poised for multiple expansion.”
An additional price target boost came from a Nomura Instinet analyst on January 2. David Wong boosted the target price on the stock to $58 from $40. Also, Wong kept the “buy” rating on the company.
Wong foresees that AMD will “continue strengthening its competitive position in 2020 with a “steady stream” of new product launches in … the 7nm and 7nm+ technologies.” Wong also expects AMD to continue to gain market share and to increase its average sales price, operating leverage, and revenue growth.
AMD’s technical outlook
Multiple technical indicators show “overbought” conditions for AMD stock. For instance, the company’s RSI index value of 75.04 tells us that the stock is overbought. In addition, the Money Flow index value of 84.65 exceeds the RSI index value and floats in the overbought zone as well.
Let’s look at AMD’s Bollinger Band indicators. AMD’s upper, middle, and lower levels come in at $49.64, $43.46, and $37.65, respectively. In Friday’s trading session, the stock closed near its upper Bollinger Band level, meaning that the stock is currently overbought.
Valuation and takeaways for AMD stock
The stock currently trades with a forward non-GAAP PE multiple of 78.32x, which is significantly higher than the sector median of 24.37x. Moreover, the company’s PE is floating around the upper range of its historical value, confirming its overvalued condition.
Now let’s look at AMD’s peers. Nvidia (NVDA), Micron (MU), and Intel’s (INTC) forward non-GAAP PE multiples are 42.28x, 25.08x, and 13.05x, respectively. This means that AMD is the most overvalued company among its peers based on the forward PE multiple.
At a current price of $48.60, analysts set the consensus price target of $38.10, which represents a 21.6% downside. You can refer to MarketBeat for a detailed breakdown.
According to TipRanks, AMD is a “moderate buy” with an average price target of $40.24, representing a 17.2% downside. As we can see, many analysts expect a pullback, which generally confirms my thesis. Among the 22 analysts covering AMD, 11 gave it a “buy” rating. Ten rated it as a “hold,” and one rated it as a “sell.”
My stock recommendation
Putting all these things together, I recommend purchasing AMD stock when it falls to better valuations. I consider AMD a “hold,” considering Friday’s share price of $48.60. As a result, my rating is due to the high probability of a pullback.
My initial recommendation would be to wait for the next sub-45 drop if you’re interested in buying the company. However, a knowledgeable investor willing to enter the company at current levels may sell covered calls as well as a portion of shares and wait for the quarterly report.