BRAZIL – 2019/08/03: In this photo illustration the Advanced Micro Devices (AMD) logo is seen … [+]
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Advanced Micro Devices stock (NASDAQ: AMD) is up around 15% since the beginning of this year, and at the current price of around $53 per share, we believe AMD stock could see significant downside.
Why is that? The key is AMD stock is still 420% higher than it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 420% Change In Advanced Micro Devices Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
Some of this rise over the past 2 years is justified by the roughly 28% growth seen in AMD’s revenues, and by the company finally turning profitable, with EPS rising from $-0.03 in 2017 to $0.31 in 2019.
Further, revenue on a per share basis grew only 12%, due to an increase in the outstanding share count. To be precise, AMD’s share count grew 15% from 2017 to 2019.
Finally, AMD’s P/S ratio rose sharply from about 2x at the end of 2017 to over 7x by the end of 2019, due to rising investor expectations surrounding AMD’s line of new gaming processors. While AMD’s P/S multiple rose further and currently stands at 9x, given the volatility of the current situation, there is a significant possible downside for AMD’s multiple when compared to levels seen in the past years – P/S of 3x at the end of 2018, and 7x as recently as 2019.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there is much lower demand for laptops and computing devices right now, with discretionary items just not a priority for people at the moment. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe AMD’s Q2 results in August will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.
If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from current level of 9x to around 7x, which combined with a reduction in revenues and margins could result in the stock price shrinking to a little under $40.
For more insights into how AMD compares with Nvidia, its closest peer, view our interactive dashboard Nvidia vs. AMD: Does The Stock Price Movement Make Sense?.
Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here