<p>Advanced Micro Devices (NASDAQ: AMD) shares are one of the few names on Wall Street that are still doing quite well despite the market correction. It will fall by about 10% in 2020, even though the share price had been kept mostly until Thursday’s sale.
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In addition, the stock, even though it is trading at a very rich 42 times forward result, has not cratered. Investors can not say the same about many other highly valued names. One reason for this is that the company has not revised its results, as many others have done.
The result should be stable by 2020
For example, on March 5, when the coronavirus from China caused panic, the company held a “Financial Analyst Day.” CFO Devinder Kumar’s presentation stood out among the presentations on its investor relations website.
This indicates that enormous growth in revenue is expected in 2020. For example, revenue increased during the year by 16% at a long-term compound annual growth rate (CAGR). For 2020, AMD expects a 28% to 30% long-term CAGR.
It also expects flat earnings per share growth. This is actually an achievement, because so many companies predict a decline in earnings.
Part of the reason why the company does not expect coronavirus to have any major effect on its sales is that it sells gaming chips. Players do not go out and interact with the world. They will not get the virus.
The same type of reasoning applies to its data center chips and CPU chips. People will not stop calculating or playing because there is a pandemic. In fact, they may want to do more computer and gaming.
Advanced Micro Devices’ Outlook
Analysts came impressed from Financial Analyst Day. For example, Jefferies raised its AMD target from $ 58 to $ 60 after the event.
According to Seeking Alpha, the Jefferies analyst said AMD “presented a compelling strategy and roadmap.” It will place it ahead of competitor Intel (NASDAQ: INTC) in microprocessors and help it gain CPU parallel processing share.
Another analyst at Seeking Alpha wrote a brilliant report on AMD‘s technological advances, which was presented at the conference. The analyst said that AMD continues to build on the driving force it began creating a few years ago.
And another analyst wrote an article saying that short-term interest in the AMD stock continues to decline. This means that fewer people are investing in the fact that the AMD share will fall significantly.
I suspect that the stock will continue to drift lower along with the market. The price-to-revenue ratio is still very high. In addition, the company’s value-to-EBITDA ratio, a cash flow measure, is even higher close to 50 times.
It is very high conditions for a share to have zero growth in earnings, despite all its growth.
What should investors in AMD stocks do?
Barron recently published an article on why Wall Street loves AMD shares so much. In short, analysts like the huge goals over the next four years that Advanced Micro Devices is projecting.
The main reason why analysts like AMD so much is that they believe that it will now finally take back a higher market share of semiconductors. This applies to both the company’s computers and the data center.
If these predictions come true, the stock may be worth the high valuation Wall Street has placed on it. But my point remains. You pay for what you get. You pay a premium price for a premium growth company.
There is no find element involved. In addition, the company must perform. If it does not, AMD shares will fight. Let the buyer beware.
At the time of writing, Mark Hake, CFA holds no position in any of the above securities. Mark Hake runs the Total Yield Value Guide which you can review here. The guide focuses on high total return values. Subscribers get a free trial period of two weeks.