April 18, 2020
AMD Premium Price May Tank if Earnings Don’t Excite
AMD will report first quarter earnings on April 28, 2020. This premium priced stock has been one of the best performing companies on the S&P 500 over the past few years. Investors should be cautious purchasing near all time highs and consider complications if the company misses earnings. Today the stock is trading at $56.60 and has a market cap of 66 billion.
Investors are considering the growth opportunities which exist with AMD where revenue is expected to compound 20% over the next few years. At a current price to earnings ratio over 100, AMD is not a cheap stock. The growth potential is already reflected in the current stock price and should raise concern for new investors.
The fear of a slowing world economy surrounding COVID-19 could have an impact on revenue and earnings although the company has maintained little to no disruption over the past few months. This is contrary to a number of other global companies who have stated supply chains, revenue, and earnings will be affected due to lower economic activity. Many countries have enacted lock downs which have seen businesses temporarily shut down in order to protect citizens and employees. While it is possible to see some uptrend in consumer and server upgrades during this period of time, I also believe some larger infrastructure purchases could be put on hold as companies try to save cash reserves to weather through uncertainty.
AMD is a small company compared to its chip rival Intel, who last year brought in 71 billion in revenue and net income of 21 billion. This compares to only 6.7 billion in revenue and net income of 341 million for AMD. Intel also boasts a healthy $1.32 annual dividend and a reasonable price to earnings ratio around 12. Looking into forward earnings over the next two years if AMD were to hit all high earning estimates we could see price to earnings decrease within a range of 25-35 times. If the company could achieve such growth it would still be trading at a significant premium to chip peers.
My fair value estimate for AMD is around $25.00. At the time of writing this article I am short AMD.