Advanced Micro Devices (AMD) is among the leading chipmakers investors continue to watch closely, as volatility once again rears its head in the world of artificial intelligence (AI) and AI-related stocks.
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As the chart above shows, clearly many investors and market participants aren’t sure of the direction of travel of this particular semiconductor maker moving forward. With shares of AMD now consolidating around the $200 level, the question is where will AMD stock head from here.
Let’s dive into one key catalyst some investors are pointing to as a potential headwind or tailwind for AMD, depending on how you look at it.
Reportedly, AMD CEO Lisa Su will be meeting with Samsung chairman Jay Lee in South Korea on March 18, but the news has done little to stem the bleeding in this particular name. Down more than 2% for the past five days, it’s becoming increasingly clear that stock-specific news is coming in second place to broader macro news around the U.S.-Iran conflict — and what that could mean for the global economy overall.
That said, this development that AMD and Samsung are meeting could propel AMD stock higher relative to its peers. That is, if the meeting does yield some positive developments for the chipmaker in its pursuit of nailing down more consistent high-bandwidth memory, which is becoming increasingly difficult to find.
The memory piece of the AI puzzle appears to becoming more complex by the week, with a surge in chip demand requiring a requisite increase in the amount of memory produced. With this key meeting setting the stage for AMD to potentially find a workaround, there’s plenty to like about how the stock is positioned right now.
Looking at the fundamentals, AMD is clearly far from the cheapest stock on the market. Indeed, with a price-to-sales (P/S) ratio near 10 times and a forward price-to-earnings (P/E) ratio of around 34 times, shares are certainly priced for some significant growth ahead.
The reality is that the sheer demand for chips — driven by AI and a number of other technologies that are going through super cycles right now — will continue. As such, investors appear to have pushed out their forward growth expectations, with the belief that companies like AMD will simply not be able to sell as many chips as they’re producing (at maximum capacity) for a number of years.
I think that narrative may be broadly correct, although Su’s meeting with Samsung does highlight one of the big issues for this sector. If memory becomes the bottleneck some investors are fearing, it’s possible that we could actually see the overall sector’s top- and bottom-line growth rates decelerate, with margins becoming compressed. I don’t see that taking place for at least the next few quarters, but this memory crisis is starting to change the calculus on names such as AMD.
That said, it’s also my view that AMD is reasonably priced right now, relative to its underlying growth rate. Maybe the most pertinent metric that investors should pay attention to when it comes to stocks like AMD is the underlying P/E-to-growth (PEG) ratio. A ratio under 1 times signals that a stock is undervalued (particularly those in higher-growth areas of the economy).
With a PEG ratio of 0.73 times as of this writing, AMD has growth baked into its valuation, though perhaps not enough. I’m in the camp that AMD should likely be trading closer to a PEG of 1 times, so this is a stock I think could have around 35% upside from here.
Based on 45 analysts with coverage, the average price target for AMD stock stands at $287.68 per share. Given where shares of AMD trade now, this means that experts following the company believe there’s around 47% potential upside from current levels.
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Accordingly, my 35% upside estimate is actually lighter than what most Wall Street analysts think could be ahead for AMD. Indeed, this has been a top growth stock in the market for a long time, and that’s a trend that should continue moving forward. Outside of any significant major macro shocks (which we could potentially see, given increasing geopolitical tensions), AMD is one company that investors should still be watching closely.
To me, this stock is a strong buy based on its fundamentals and the firm’s strategic push to get ahead of future operational bottlenecks. Investors who are thinking long-term and looking for increased exposure to the AI trend may do well to consider adding exposure to AMD stock at current levels.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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