Advanced Micro Devices, Inc. (NASDAQ:AMD) Stocks Shoot Up 46% But Its P/S Still Looks Reasonable

Advanced Micro Devices, Inc. (NASDAQ:AMD) shareholders have had their patience rewarded with a 46% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 49%.

After such a large jump in price, Advanced Micro Devices may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 12.8x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 5.2x and even P/S lower than 2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Advanced Micro Devices

What Does Advanced Micro Devices' Recent Performance Look Like?

Advanced Micro Devices could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

Advanced Micro Devices' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. The latest three year period has also seen an excellent 37% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 29% per year over the next three years. That's shaping up to be materially higher than the 25% per year growth forecast for the broader industry.

With this information, we can see why Advanced Micro Devices is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Advanced Micro Devices' P/S

Advanced Micro Devices' P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Advanced Micro Devices maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Semiconductor industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Advanced Micro Devices with six simple checks.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.