AMD Stock Jumped After Its Report. I'd Wait for a Lower Price to Buy.

Advanced Micro Devices (NASDAQ:AMD) gave investors a big number on Tuesday, Nov. 3. Along with its third-quarter results, management said on the earnings call that it now expects revenue to rise over 80% in 2027. That's more than double the annual growth in the long-term model AMD set out at its financial analyst day last November.

Shares jumped. After closing Tuesday at $483.90, the stock gained about 7.5% in after-hours trading to roughly $520. The stock has given back most of that gain since, and at around $490 as I write, it's about 25% under $649.42, the record close on Oct. 6.

On Oct. 27, I wrote that I'd hold a small position in AMD through 2030, though I wouldn't expect the stock to triple again. The report doesn't change that long view. What it does change is how much weight I'd give next year's earnings -- enough to set a price on them.

Image source: AMD.

Data center sales keep accelerating

Showing how fast the company is scaling, AMD's third-quarter revenue climbed 45% year over year to $13.4 billion, and non-GAAP (adjusted) earnings per share jumped 74% to $2.09.

The data center segment, which sells server processors and artificial intelligence (AI) chips, powered most of that growth. Its revenue almost doubled, climbing 97% from a year ago to a record $8.5 billion, up from $6.7 billion in the second quarter and $5.8 billion in the first. Notably, its quarter-to-quarter growth picked up from 16% in the second quarter to 27% in the latest one. And the segment now makes up 64% of AMD's revenue, up from 47% a year ago.

The fourth-quarter forecast is even steeper.

AMD expects around $17 billion in revenue, up about 66% from a year earlier and 27% from the third quarter. Management expects growth to speed up as AMD scales production of Helios, its rack-scale AI system.

Where's the cash?

Earnings are soaring, but the cash isn't keeping up. AMD's free cash flow dropped to $554 million in the third quarter, or around 4% of revenue, down from $1.5 billion in the year-ago quarter. And it has fallen in both of the past two quarters, from around $2.6 billion in the first quarter to $1.6 billion in the second.

Most of the gap between profit and cash went to inventory. AMD's stockpile grew around $3 billion from June to September, to $11.5 billion, bringing this year's build to about $3.5 billion. Capital spending is climbing, too. AMD spent around $650 million on property and equipment in the third quarter, up from about $260 million a year ago.

And management expects to keep spending on both.

"We expect to continue to invest in inventory and capacity to support our strong growth in 2027," CFO Jean Hu said on the call.

Put simply, AMD is paying up front for next year's sales. Yes, that's arguably the right move for a company whose CEO, Lisa Su, said demand is outpacing supply. But it also means earnings come in well before cash does.

Of course, if customers put off their deployments, $11.5 billion of inventory might become a problem.

I'd pay around 30 times next year's earnings

On average, analysts expect AMD's adjusted earnings per share to hit about $16 in 2027. That's around double the $8 or so it looks on track to earn this year: $5.12 through September, plus about $2.90 implied by its fourth-quarter guidance for revenue, margins, spending, tax and share count.

Management's forecast makes the 2027 estimate look reachable. Besides the revenue growth of over 80%, Hu said AMD expects operating expenses next year to rise at under half that pace, which could lift its profit margin.

At around $490, the stock has a price-to-earnings ratio of about 31 on AMD's expected 2027 earnings. For comparison, the forward price-to-earnings ratio for the S&P 500 (SNPINDEX:^GSPC), based on the next 12 months of expected earnings, is about 19. AMD can justify a hefty premium to that if its earnings double as expected. Still, I don't want to pay much more than around 30 times expected 2027 earnings, mostly because of the cash.

At 30 times earnings, my buy price is about $480. That's near Tuesday's close and a little below where the stock trades now.

Overall, the report made me more confident about AMD's 2027 outlook. But the company still needs to convert those earnings into cash, and the stock already prices in much of that growth.

At or below $480, I think AMD stock is worth considering for a small position. At roughly $490, I'd wait.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.