No, advanced micro-devices are not too expensive

<p>One of the most common mistakes that investors make is to fall victim to what is called “anchoring bias”. Advanced Micro Devices (NASDAQ: AMD) stock is one of the best examples of how harmful that bias can be.

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Anchoring bias is not limited to investing. It is simply an overconfidence in the first information we receive. For example, if we see a TV that costs $ 3,000, the next TV that costs “only” $ 1,200 seems cheaper. Had we seen a $ 400 TV first, however, our perception of the $ 1200 price would be very different.

For investors, it is often past prices that drive anchoring bias. Think of a stock that once traded at $ 50 but now trades at $ 15. It seems like an opportunity. It’s on sale. “It’s cheaper.”

Now think of the opposite: a stock that has gone from $ 15 to $ 50. That stock seems potentially expensive. Many investors would think that, as the old saying goes, “the simple money has been made.”

Rarely, however, is any of the arguments true. After all, the stock market updates its prices based on the investor’s reaction to new information. The $ 50 stock at $ 15 is not the same stock as it was at $ 50.

Again, the AMD stock is a perfect example of how this prejudice can lead investors to miss out on big profits. During a dizzying run from 2016 low, the AMD stock has repeatedly looked as if it has gone too far. It has repeatedly looked too expensive. It has repeatedly acted as an obvious candidate for profit.

Admittedly, all of these things have sometimes been true – at least from a short-term perspective. But over that stretch, AMD has consistently made new highs. With another, more modest withdrawal seemingly at the end, I think the pattern will be repeated.

The Incredible Run in AMD Stock

In February 2016, AMD shares traded below $ 2. Less than five years later, it’s now at $ 84.

There are no tricks behind these wins either. There is no reverse split. AMD has accumulated more than 4700% from its lowest intraday on February 11, 2016.

Throughout the stretch, investors could have believed – and really believed – that the run was coming to an end. Thanks to a sizzling earnings report in April 2016, AMD more than doubled in two and a half months. It doubled again in August.

At the end of 2016, AMD was over $ 11 – an increase of more than 500% from the February situation. Sure, that meant the drive was over.

In fact, for a time it was. The AMD stock actually fell 9.3% in 2017 and ended the year just over $ 10. But the stock took only one breath. In both 2018 and 2019, AMD was the best-performing stock in the S&P 500. It collected another 85% in 2020 and placed it in fourth place among the components in the index.

Millions of investors constantly ignored the stock due to anchoring bias. They hoped it would pull back to $ 3 or $ 10 or $ 15. Sometimes it did: AMD saw major downsides in March this year and in the fourth quarter of 2018. But usually it just kept rising. Investors who thought the stock had “gone too far, too fast” or were “too expensive” continued to miss.

This time is no different

Of course, I do not think that AMD will gain another 4700% in the next five years. But the same broad principle applies.

After its modest rally, the AMD stock does not seem cheap. It is traded at 51x next year’s results. It has put out a historic rally over the past five years. It hardly seems like a bargain.

But AMD shares should have put up an incredible rally. It is an incredibly different company. At the beginning of 2016, the company was an advanced chip company that could only compete on cost and mainly served a seemingly dying market for personal computers.

The sign above the door is the same, but this is not the same company. The Ryzen line makes AMD a real force in computers. EPYC moved the company to the lucrative data center market, and Radeon GPUs (graphics processing devices) make AMD a force in gaming.

What AMD stock costs in 2016, 2018 or in March have no bearing – none – on what it’s worth now. What is important is what the future holds.

It looks very bright. This is a company that will now benefit from several megatrends. It’s one of the biggest potential winners of this decade, a decade I call “Roaring 2020s.”

That’s why the AMD stock is at $ 84. And that’s why it can go even higher – just as it has for almost five years now.

At the time of publication, neither Matt McCall nor the InvestorPlace Research Staff member who is primarily responsible for this article (either directly or indirectly) holds any positions in the securities mentioned in the article.

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