It has been an impressive few years for some microchip companies. While a lot of focus has been on Nvidia (with its share price up 1,360% over five years), it is not the only game in town. Advanced Micro Devices, known as AMD, has also been doing well. Over the past few weeks, AMD (NASDAQ: AMD) stock has shot up 43%.
Its five-year performance leaves it trailing Nvidia badly. Still, at 103%, it means the share has more than doubled in that timeframe. As an investor, I would always be happy owning a share that could put in that sort of performance.
So, might the recent run upwards continue – and should I buy some shares for my portfolio?
Short-term momentum may have ended
Over the past week, the AMD share price has moved downwards. That might mean that the surge is over for now, or it could be that the price is taking a breather while the market collectively decides what to do next.
As a long-term investor, though, I am not so interested in short-term gyrations except where they might suddenly offer me a cheap buying opportunity.
What, then, about the long-term investment case here?
AMD shares look pricy
I think a lot is riding on the expectation that AMD’s business performance is set to improve. If it keeps performing as well as it has been lately, I believe the share price could rise further.
At the moment, the stock is trading on a price-to-earnings (P/E) ratio of 82. That is almost double Nvidia’s P/E ratio and far above what I typically pay for a share.
Like many of its peers, AMD has been doing well lately. In the first quarter, revenues soared 36% year on year and net income was up a stunning 476%.
Clearly, demand for chips has been robust in recent years and I reckon that could continue over the next several years, as AI investment by large firms continues. AMD struck an upbeat tone about the outlook for the second quarter and beyond when delivering its first quarter earnings statement.
Still, that valuation looks crazy to me. I already find Nvidia overpriced – and AMD stock trades on close to double its rival’s P/E ratio.
Great growth story, but not good enough to justify the price
Obviously, very high growth expectations are built into the current share price.
The company is benefitting from a rising tide in its industry and I also credit current management with making the most of that. Its approach to AI has helped position it among the front-runners as AI-related chip demand has grown dramatically.
But it is not the only runner in the race and faces stiff competition. Tariff uncertainty and export controls are a risk to both revenues and profits. On top of that, it remains to be seen whether AI has brought a stepchange in chip demand or just a prolonged one-off ramp-up phase while customers spend heavily on initial installations.
The current valuation of AMD stock offers me nothing like the margin of safety I would want given such risks. So, for now, I have no plans to invest.
