AMD Reports on Nov. 3. Here's What You Should Do Before Then.

Earnings for Advanced Micro Devices (NASDAQ: AMD) are right around the corner. This can be a tumultuous time in the stock market, as companies can either exceed expectations and soar, or miss them and plummet. The risk becomes even higher when stocks are highly valued, like AMD is, as it must blow expectations out of the water to justify its current valuation.

As a result, I think investors should consider taking action before Nov. 3 (when AMD reports), because the stock has a very high valuation that may be tough to live up to. Here's why.

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AMD's stock is very pricey

AMD's shares have had an incredible year, rising nearly 150% so far. However, the business hasn't been growing nearly that fast (although its earnings have).

AMD EPS Diluted (Quarterly YoY Growth) data by YCharts.

AMD's margins are dramatically improving, which is driving the strong earnings growth. However, some of that growth should go to offsetting its expensive stock price, as it trades at a ridiculous price tag of 136 times trailing earnings.

AMD PE Ratio data by YCharts.

Industry rival Nvidia trades for about 27 times earnings, which I think is a fair price tag. For AMD to fall to 30 times earnings, either the stock price would have to collapse (I don't think it will), or it must increase its earnings by about 350%.

The market is bullish on it getting that done, because its stock trades for 34 times next year's earnings estimates. So, that tells investors that there's basically a year and a half worth of very strong growth already baked into the stock price.

That's a steep price to pay for a stock like AMD, especially one that isn't the industry leader (Nvidia is). I think this reality could set in following a third-quarter (Q3) earnings announcement. Investors will begin to realize how expensive AMD's stock is and how cheap Nvidia's is, and rotate from one into the other. This could ignite a major sell-off as investors race to take gains and find the next biggest stock before 2027 arrives.

AMD's stock has gotten in front of itself. While the company has made up some ground in the artificial intelligence (AI) arms race, it's still not nearly enough to be a huge challenger to Nvidia. Nvidia is still growing at a much faster pace overall (106% in Q2 versus 50% for AMD), underscoring that it's still the top dog in the industry. While AMD's stock price assumes that it has outright won the AI computing unit battle, that's far from the case, and AMD shareholders need to be cautious as a result.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.