AMD Has More Than Tripled Off Its Low and Still Trades 20% Below Its High

Advanced Micro Devices (NASDAQ:AMD) is having one of those years where two opposite descriptions of the stock are both accurate. Shares trade near $465 as of this writing. That is more than triple the 52-week low of $149.22, set last fall. It is also about 20% below the 52-week high of $584.73, reached on June 30.

So which end of the range tells the truth?

A buyer today is paying about three times the stock's autumn low, for a company the market valued a quarter higher less than two months ago. Whether that price is a bargain or a warning comes down to what changed between those two marks -- and the honest answer is that the business changed far less than the valuation multiple did.

Image source: AMD.

The business has only gotten better

Consider AMD's impressive second-quarter update.

Revenue in the period rose 50% year over year to $11.5 billion. And data center revenue climbed 107% to $6.7 billion (58% of company revenue) on demand for the company's Instinct AI accelerators and EPYC server processors. Further, management guided for about $13 billion of third-quarter revenue, roughly 41% year-over-year growth.

That report landed on Aug. 4, with the stock already well below its June high. Shares fell further after it, and this week's chip sell-off, which began as long-term Treasury yields jumped, took another bite. The slide since June, in other words, hasn't tracked the company's results. The results, and then the outlook, kept improving straight through it.

The low end of the range is easier to explain.

Last fall, the stock could be had for less than a third of today's price, because the market had real doubts about how much artificial intelligence (AI) business AMD would ever win.

Then came a string of customer commitments -- including an agreement to supply OpenAI with 6 gigawatts of its graphics processing units (GPUs), sweetened with a warrant covering up to 160 million AMD shares -- and quarter after quarter of accelerating data center sales. The tripling off the low is the market repricing AMD as a genuine second source for AI computing.

Compression, not deterioration

Notably, the analyst consensus for the coming year runs near $11 per share on an adjusted basis -- nearly double the adjusted earnings AMD reported over the past four quarters. Measured against that same forward figure, the stock cost about 53 times these forward earnings at its June 30 high. Near $465, it costs about 42 times.

In other words, the price of a dollar of AMD's expected earnings fell by about a fifth, while nothing in the company's growth outlook worsened. What worsened is the market's willingness to pay -- first in the pullback around August earnings, and again this week, as the 30-year Treasury yield touched its highest level since 2007 and chip stocks sold off.

Ultimately, today's price carries less froth than June's. But a price at 42 times those expected earnings still assumes years of rapid growth. In other words, it already counts the near-doubling analysts project -- and plenty beyond it.

Time to buy?

The stock is cheaper, but not necessarily attractive.

Sure, the range's low end is gone for good reasons: AMD is a different company than it was at $149, with a data center business running at a $27 billion annual pace and growing at triple digits. Anyone waiting for those prices again is waiting for the AI case to collapse.

But the high end deserves skepticism, too. June's $584.73 was a market paying 53 times forward earnings, with the sector's momentum at fever pitch.

So, is AMD stock a buy 20% below its high?

To me, the discount is the market repricing risk, not a mis-priced and undervalued stock to pounce on.

The business results argue for the company, and they keep getting stronger. But at 42 times expected earnings, the price still asks for years of things going right, in a sector that just spent a week repricing against a 30-year Treasury yield near its highest level since 2007. While a 20% pullback makes the stock a smaller leap of faith than it was in June. It is a leap of faith all the same.

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.