Stock Analysis

AMD’s (NASDAQ:AMD) Upside Potential May be Limited in the Medium Term

  •  Updated
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The stock price of Advanced Micro Devices (NASDAQ:AMD) has been going through a correction for the last two months. There has been a lot of attention on the stock recently in anticipation of a resumption of the bullish trend - although an initial breakout was derailed by yesterday’s market wide selloff. 

If the recent low of $99.51 holds, another break to the upside is very likely. We think investors may need to manage expectations regarding how much follow through such a move would have. On the other hand, if the stock price continues to fall, it would offer a better entry point with a more reasonable valuation.

See our latest analysis for Advanced Micro Devices

What's the opportunity in Advanced Micro Devices?

According to our estimate of AMD’s fair value, which is $82.24,  the stock is overvalued by about 23%. This estimate is based on earnings forecasts and is sensitive to any changes in those forecasts and the discount rate (more on this estimate here). This premium isn’t a big deal for a company that has grown revenue by 465% over the last five years. But it may become an issue when we look at growth forecasts for the next few years.

As the chart below illustrates, AMD’s earnings growth is expected to slow down over the next 18 months before accelerating again in 2023. Over the next 12 months , AMD’s earnings growth  is expected to be in line with the broader market and the semiconductor industry.

NasdaqGS:AMD Earnings and Revenue Growth September 28th 2021
NasdaqGS:AMD Earnings and Revenue Growth September 28th 2021

If earnings and revenue growth remains below 15% over the next 12 to 18 months, as analysts expect, it’s likely to weigh on sentiment, and limit upside for the share price. AMD is trading on a price-to-earnings ratio of 35, which is twice that of the average US stock. This typically implies that investors have higher expectations for a stock than for the broader market.  If you believe forecasts will rise, that may not be a problem. However, given the cyclical nature of semiconductor stocks and the ongoing chip shortage, there may be some risk to expecting forecasts to rise.

The Bottom Line

AMD’s prospects for the long term are strong, but the share has run hard in the last 18 months and medium term upside may be limited. In the past the share price has respected the 200-day moving average more often than not. This moving average is now at $90 and there is potential trendline support at $86. This area would imply a much smaller premium and a safer entry point for long term investors.

You can track analyst forecasts for AMD as well as any risks we identify on our free AMD report which is updated daily.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article 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.

Richard Bowman

Richard Bowman

Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.

About NasdaqGS:AMD

Advanced Micro Devices

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide.

Flawless balance sheet with reasonable growth potential.