AMD Stock Forecast: I Would Steer Away From AMD For Now

The article was written by Anna Latini, a Financial Analyst at I Know First.

AMD Stock Forecast

Summary:

  • A Look Into AMD Financials
  • AMD Future Outlook And Valuation
  • AMD Should Not Count On Cryptocurrencies According To Barclays
  • Not The Most Appealing Industry To Be In
  • I Know First Bearish Short Term Forecast

Advanced Micro Devices, Inc. (AMD) is an American multinational semiconductor company based in Sunnyvale, California, United States, that develops computer processors and related technologies for business and consumer markets. Initially the company manufactured its own processors. As time passed, the company later outsourced its manufacturing, a practice known as fabless, after GlobalFoundries was spun off in 2009. AMD’s main products include microprocessors, motherboard chipsets, embedded processors and graphics processors for servers, workstations and personal computers, and embedded systems applications.

amd stock forecast

 

A Look Into AMD Financials

Advanced Micro Devices, Inc. (AMD) stands in a peculiar position as it produces both central processing units (CPUs) and graphic processing units (GPUs). In the first segment, AMD competes with Intel Corporation (INTC) while AMD competes with Nvidia Corporation (NVDA) in the GPU market.

On July 25th, the company posted its Q2 results and beat its estimates, sending AMD shares up to 2017 highs. Afterwards, investors started to cash-in profits and price got back to pre-announcement levels. Although the company posted a 19% increase in Y/Y revenues, driven by the Computing and Graphics segment, profit is still in the red with a net loss of $16 million. To be precise, the last time the company reported profits on an annual basis was in 2011 — unlike many of their competitors.

It is true that Advanced Micro turned itself around since early 2016 when it was close to bankruptcy. But considering the company shares are now up 540% since Feb. 2016, I think most of the improvements are already incorporated in the current stock price.

Finally, by looking at leverage ratios we see AMD has the highest D/E and debt to asset ratio out of its 5 main competitors and for a company that has not posted a profit for years, this does not appear appealing.

 

amd stock forecast

AMD Future Outlook And Valuation

Let’s look now at what are the management expectations for the company’s future.
They expect operating margins to reach 14% in the long-term. Operating margins were 4% on a non GAAP basis last quarter, so that would mean 1,000 basis points of margin increase.
That is possible over the next five years given the promising product mix shift and strong revenue growth. If we assume that net profit margins expand 1,000 basis points as well, that brings AMD net profit margin to 11% in five years. Let’s assume an optimistic revenue increase of 15% per year over the next five years that translate in only $8.58 billion in revenue. An 11% profit margin implies net earnings of about $944 million. At the moment, AMD has a market capitalization of about $12.7 billion which means a valuation of 13.4 times earnings projected for 5 years from now.

Since the company isn’t profitable, it is not possible to compare it to its peers using measures as the current price-to-earnings ratio. However, we can still look at its price-to-book ratio for instance. This is equal to 30.94, above that of its competitors, including Nvidia which has a P/B ratio of 16.72. Such a divergence comes from the high degree of leverage that the company has, which pushes down its book value.

AMD Should Not Count On Cryptocurrencies According To Barclays

The fact that Advanced Micro Devices, Inc. quarterly beat was driven almost entirely by the sale of the data-mining graphics processing units for the Ethereum cryptocurrency should be a cause for concern among investors, Barclay analysts said Tuesday.

“This does not mean AMD is going to miss September guidance as GPUs are still widely sold out and there will be a restocking phase, but we believe estimates could be too high next year should this Ethereum tailwind dry up,” analysts Blayne Curtis and Christopher Hemmelgarn said in a note. Analysts set a price target of $9 and rated the stock Underweight.

Outside the cryptocurrency mining market demand, AMD has lost market share to Nvidia in the gaming market, according to data from Steam, a digital PC game store. In addition, they estimated that due to high graphics card prices in the secondary market it is now not profitable to mine Ethereum.

Not The Most Appealing Industry To Be In

Up to now, all elements seem to point towards AMD being a maxed-out stock at the moment. However, let’s look at the industry the company is operating in. The semiconductor industry is a very difficult, zero-sum industry. It is a sector in which industry leaders tend to dominate and be the only one earning profits, while smaller firms experience returns lower than their cost of capital, thus destroying value for shareholders. As we have seen, this has been the case for AMD, which competes with a market leader, such as Intel in this particular segment. Price wars are quite common when large stakes of the market are held by a few companies and are much harder to endure for a company with a weak balance sheet as AMD. Furthermore, Intel and Nvidia, have more financial resources to handle a pricing war.

AMD earns lower gross margins than its competitors, suggesting they have less pricing power. Nvidia, for instance, invested a large sum of money in creating a software ecosystem for its chips. This software only works with the company’s GPUs and hence enables Nvidia to sell chips at higher prices. Despite the new technologies the company has introduced, I believe it is still not the right time to buy the stock for those investors interested in short term returns. I don’t see AMD’s situation significantly improve in the near future. The industry seems to be unstable, with competition continuously increasing. Fujitsu Ltd is approaching the market with its Deep Learning Unit. In addition, Apple Inc. will start producing making its own GPUs rather than buying them from Nvidia or AMD.

The company does not have much upside potential in the short run, but could definitely gain momentum if the innovations it is introducing starts to deliver. It will be crucial for investors to watch any industry development closely as things could change very rapidly.

I Know First Bearish Short Term Forecast  

On August 6th, 2017, our algorithm issued a bearish forecast for AMD stock in the short term, for the 14-days, 1 month and 3-month time frames. In the past, our forecasts on this same stock have proved correct already. On March 6th, 2016, the algorithm had issued a bullish forecast on AMD for the 1-year time horizon. The company realized an outstanding 450.21% return during the period

amd stock outlook

 

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above in order to fill confident about/trust the signal.

amd stock outlook