Is the Sell-Off in AMD's Stock Overblown?
Key Points
AMD's fourth-quarter numbers beat expectations, and the company provided solid guidance for the current quarter.
Its lofty valuation, however, may have investors demanding even more.
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Shares of chipmaker Advanced Micro Devices (NASDAQ: AMD) plummeted by more than 17% on Wednesday, after the company reported its latest results the day before. What's puzzling about that response from the market, however, is that the company beat expectations, and its guidance also wasn't concerning.
AMD fell by close to 4% more on Thursday. So what's weighing on the stock right now? And could this slide present a good buying opportunity, or are there reasons to think there's more trouble ahead for AMD?
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Why beating expectations may not be enough
AMD's adjusted earnings per share of $1.53 in Q4 well exceeded analysts' consensus estimate of $1.32. And its revenue rose 34% year over year to nearly $10.3 billion, compared to the roughly $9.7 billion that Wall Street was expecting. Management's guidance of $9.8 billion (give or take $300 million) in revenue for the current quarter was also stronger than the consensus expectation of just under $9.4 billion.
Based simply on its results, there would appear to be no reason for such a significant decline in its share price following the report. However, the issue may be that AMD's valuation had gotten too high, and investors were expecting perhaps too much. In that context, AMD's beat may not have been enough of a beat. The problem is that the stock was trading at around 90 times earnings ahead of the report. That's a steep premium and effectively prices the company for perfection. Investors didn't feel it delivered perfection, leaving it ripe for a sell-off, especially given that the market is currently on edge when it comes to tech stocks.
While AMD's sell-off does appear to be overblown, it would not be surprising to see the stock fall lower in the near term, given its still-high price-to-earnings valuation in the neighborhood of 74. But if you're willing to hold it for the long haul, AMD could still be a good buy right now.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.
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