AMD Stock Forecast: AMD Soars Beyond Optimal Buying Price

 

This article was written by Grant Goldstein, a Financial Analyst at I Know First.

 

 

 

“A great company is not a great investment if you pay too much for the stock”

– Benjamin Graham

(Source: Wikimedia)

AMD Stock Forecast

Highlights:

  • AMD Beats 2018 Q1 Expectations
  • The Company is Currently Overvalued
  • Cryptominers and Tariffs Could Affect Sales

Advanced Micro Devices, Inc. (AMD) is an American semiconductor company. Incorporated on May 1, 1969, the company offers x86 microprocessors, chipsets, GPUs, APU, server and embedded processors, and SoC products and technology. The segments of AMD include computing and graphics, enterprise, and embedded & semi-customs.

AMD’s Expectation Beating Q1

The company had a remarkable first quarter this year. YoY, operating revenue increased 39.81%, EBIT 1.92K%, cash by 21.51%, and operating expense decreased by 4%. The company also showed confidence in the future of itself by increasing treasury stock YoY by 9.09%. AMD increased gross margin by 4% to 36%.

AMD Financials (Source: YCharts)

AMD saw great success in the computing and graphics segment with revenue up 95% to $1.12 billion. This success was due in part to their Radeon and Ryzen products, with a sizable portion of sales being laptops which carry this chip. This includes HP and Lenovo which had solid sales for the quarter. The company also stated that 10% of revenue came from their Radeon lineup being used for cryptocurrency mining. AMD’s brand new EPYC data center chips have been growing by double digits from last quarter, providing the company with rising revenue.

AMD’s Enterprise, Embedded & Semi-Custom segment Q1 revenue decreased 12% YoY. However, this was expected due to the current game console cycle. Consoles are predominately bought around the time they are released and then sales tend to wane. The new generation of consoles are looking to be unveiled by 2020, so AMD has long term potential for that market.  

The company has a positive outlook for Q2 2018. They expect revenue to be $1.725 billion, a 50% YoY increase. AMD expects the growth of Ryzen, Radeon, EPYC, and semi-custom revenue to drive Q2 as it did Q1.

AMD is Currently Overvalued

Currently AMD’s price is inflated. Right now, their PE ratio is 78.89, compared to the 19.49 industry average; the price to book value is 20.32, compared to the industry’s 3.848; and the PEG is 5.49, compared to the industry’s 1.653. This is showing that investors are paying too much for the expected growth of the stock.

The PE 10 ratio for AMD is at -17.30, compared to its competitors, Skyworks Solutions (SWKS), Intel (INTC), and Micron (MU), who have PE 10 ratios of 42.25, 25.96, and 46.38, respectively. AMD’s PE 10 is extremely low and concerning for stockholders. Although future earnings are expected to increase, it’s too risky to invest in this stock holding no current value.

AMD Valuation (Source: YCharts)

The company’s EV/EBITDA, which is used to determine the value of a company, is 29.51. This is a sign that investors are paying too much for the current EBITDA, since the industry average is 12.28. Investors seek for a lower EV/EBITDA as it shows the stock is of value.

AMD’s free cash flows is -$132 million. Although this is up from last years -322.00 million, this is still alarming news nonetheless. Last year, the company was investing more money, so their return could have been greater on such a tremendous cash loss.

PE Ratio (Source: YCharts)

The Fulmer H Factor is a model that is used to classify bankruptcy. Although it does not always determine if a stock should be bankrupt, it demonstrates stocks which are unsafe. A score of under 0 is deemed to be unsafe and, currently, AMD has a score of -9.296. Secondly, the Ohlson score is another indicator of a bankruptcy. A score higher than 0.5 indicates a high chance for default. AMD has a score of 1.902. While I do not believe that this means AMD will be going bankrupt any time soon, these are definitely alarming signs for the quality of AMD’s stock.

Currently, AMD’s moving averages (MA) are expressing bearish signs. The 50 day short term MA and 200 Day long term MA are both above stock price, a very bearish sign. Also, the 200 day MA is over the 50 day MA, another bearish indicator.

(Source: Yahoo Finance)

The signs are clear: compared to what the companies actually worth, investors are overpaying for AMD. Investors are banking on the company growing substantially next quarter, thus driving stock price. However, I think it’s way too late to get into the stock as the price is overvalued currently given what the company currently has.  

AMD’s Current State

Last year, 10% of AMD sales came from cryptocurrency miners GPUs. There was a lot of demand and hype surrounding bitcoin and crypto in general. However, this market seems to be shrinking and it seems that the industry is slowly dying, with NVIDIA slowing down their manufacturing of crypto GPU. With such a large percentage of sales coming from this sector, it’s going to severely hurt upcoming revenue if this market dries up this year.

AMD is prone to being damaged by tariffs. AMD’s manufacturing branch, GlobalFoundries, has a manufacturing facility in China. AMD may need to raise the prices of their chips as cost of shipping to the United States will be substantially increased. With China enacting retaliation import tariffs, AMD’s sales could be affected as they export from the U.S.

The semiconductor industry has been down due to fear of tariffs. This can be seen in SMH, the semiconductor ETF.

(Source: Yahoo Finance)

SWOT Analysis

Strengths:

The company had an outstanding Q1. They beat out all expectations and set positive expectations for Q2.

AMD is currently the leader of 7-nanometer technology and will be using it for the 2018 GPUs and CPUs. With more processing power and bandwidth, the new chip will be revolutionary. Importantly, Intel, AMD’s biggest competitors, is experiencing delays and problems with their 10mm technology. This is a huge advantage for AMD as they look to gain a portion of the market. Finally, AMD has affordable graphic cards compared to their competitors.

Weaknesses:

Many of the company’s revenue is from partnerships with other companies, such as Microsoft. This spells danger if any of the companies decide to not renew an agreement. All the companies partnered with AMD have the potential to make their own chips or partner with an AMD competitor.

The company has shockingly low R&D compared to competitors. If the company wishes to grow and expand to grow market share, the lack of research funding can hold them back.

Opportunities:

The advent of the 7nm chip could prevail AMD to gain huge market share. Also, in the coming years, new gaming consoles will be coming out, prompting more revenue for the company, that’s if Sony and Microsoft choose to use their GPU again.

Threats:

Upcoming tariffs enacted by both the United States and China may cause AMD to raise prices and cause them to lose sales. Also, the decrease in cryptominers will hurt the sales of GPUs.  Finally, competition from Nvidia and Intel is high, with both companies holding a larger market share than AMD.

Analyst Recommendation

The majority of Yahoo Finance analysts recommend you Sell or Hold AMD.

(Source: Yahoo Finance)

Mike Burton, Analyst at The Benchmark Company, gives AMD a hold rating. The analyst believes that AMD has a very promising future, but those opportunities ahead are already factored into stock price. He stated, “we are concerned that Street estimates already reflect much of [AMD’s} growth, and that valuation appears inflated beyond the levels that we are comfortable with.”

Current I Know First Algorithm Bullish AMD Forecast

I Know First has a bullish outlook for AMD. With a 1 year signal of 287.35 and a predictability of .69, I Know First believes stock price will rise in the foreseeable future.

Here is the explanation for how to read the I Know First Forecast and Heatmap.

Conclusion

I have a very bearish outlook on AMD. If you are currently a stockholder, I would suggest holding, as Yahoo Finance and Mike Burton also suggested. However, I would highly advise not buying AMD right now. Yes, I believe that the company has the potential to grow, there’s no question about it. But, right now, the stock is overpriced. Glancing at all the financial ratios, there is no sense nor value in entering AMD at the current price. Also, there are too many negative factors that can severely hurt the future sales of AMD. For instance, the shrinking of cryptominers and the harsh reality of China tariffs. Although both issues may not cause severe affects, they are something to pay close attention to for the future of the company’s sales.

I Know First’s AMD forecast does not align with my bearish outlook for the company. 

Past I Know First Success

On March 29, I Know First Algorithm gave a bullish 1 year forecast for AMD. With a signal of 109.89 and a predictability of 0.8, AMD has grown 50.9% since.

This bullish forecast for AMD was sent to I Know First subscribers on March 29th, 2018.

To subscribe today click here.