So how would I have fared if I invested in Advanced Micro Devices a year ago? And what’s next for the semiconductor giant?

A challenging year

If I’d invested £1,000 in the business last January, today I’d have a little over £550. That’s a pretty terrible return on my investment.

The stock has slumped 49% over the past year. However, it’s worth noting this part of the market (growth stocks) hasn’t performed well since late 2021.

The only upshot is that the pound is currently around 10% weaker than it was a year go. That means the dollars I’d have bought to buy this US-listed stock a year ago are now worth more in pound terms.

Are things improving?

There are several factors to consider here. Firstly, investors likely have Advanced Micro Devices as part of their portfolio because they see the stock benefitting from technology-related trends. These microchips are a big part of the future.

But near-term performance has clearly been concerning. PCs are a considerable part of its business and the firm has already started feeling the negative repercussions of slowing computer sales.

In highlighting this, the company recently reported third-quarter revenue of $5.57bn — that’s $1bn lower than it previously guided for in the second quarter — and below analysts’ expectations of $5.62bn. However, it’s up 29% year on year.

And in the current macroeconomic environment, investors are worried that growth may slow further as we enter 2023.

Should I buy this stock?

The near-term environment is clearly challenging for many growth stocks. But I don’t see this as a reason to discount Advanced Micro Devices as an option. After all, semiconductors are going to be a huge part of our increasingly digitalised world.

The firm has several advantaged over competitors such as Intel. AMD is a ‘fabless’ semiconductor firm, meaning it doesn’t have its own foundries. This could be seen as a disadvantage, but foundries are expensive to run and require constant investment to continually develop smaller and more advanced chips. So it can also be seen as an advantage.

Instead, the firm only has to design its chips to ensure they’re compatible with a third-party contract chipmaker like Taiwan Semiconductor Manufacturing. There clearly are benefits to this arrangement. The firm’s latest Zen-based processor is the most powerful consumer-grade chip on the market. 

Advanced Micro Devices also shares a near-duopoly with Nvidia in the discrete graphic processing unit market —  a discrete GPU is one that’s separate from the processor. The chips are also used for the PS5 and Xbox Series S and X. Intel doesn’t provide any similar chips for gaming consoles to date.

So would I buy this stock? Well, while I’m bullish on the long-term prospects of the sector, I’m anticipating more volatility in the near term. As such, I’ll keep a close eye on Advanced Micro Devices, but I’m not buying yet.

The post If I’d invested £1,000 in Advanced Micro Devices shares last year, here’s what I’d have now! appeared first on The Motley Fool UK.

Chipping away?

Once a pandemic darling due to sky-high prices, AMD’s momentum has quickly died down this year. Fears of a recession have dented demand for semiconductors substantially. Nevertheless, this is due to demand for graphics cards and computer processors taking a hit. Thankfully for shareholders like myself, AMD is more than that.

These segments all have different margins and prospects. But all together, the group’s operating and profit margins are considered to be healthy at above 10% on a trailing 12-month basis. More importantly, these margins have been growing on average, which is always a positive indicator of a good investment.

Nonetheless, AMD currently trades at a price-to-earnings (P/E) ratio of 42. This is more than double the S&P 500‘s average P/E of 21, which could indicate that the stock is rather expensive.

Advancing growth

It’s worth noting, however, that the P/E ratio is a lagging indicator. A more accurate way to value AMD would be to look at its forward P/E. This takes its forecast future earnings into consideration. With a forward P/E of 19, it can be said that I’m paying a fair value for future earnings growth within a year. To complement this, the tech stock’s forward price-to-earnings (PEG) ratio stands at 0.4.

The bulk of AMD’s growth next year is expected to come from its Data Centre and Embedded segments, while Gaming and Client stay relatively ‘flat’. Thus, it’s possible to see the former two segments overtaking the latter in revenue by the end of next year.

More crucially, the Data Centre and Embedded branches have higher margins. Consequently, that should allow the chip producer to improve its bottom line in 2023. This is evident in the projected earnings growth for the company.

Processing returns

Having said that, AMD isn’t exactly renowned for its amazing return on assets, capital employed, and equity. In fact, it’s underperformed the likes of NVIDIA and Intel in 2022. This indicates that the firm isn’t able to make the best use of its assets and capital to generate profits in recent times.

Despite that, it’s still worth pointing out that the group did briefly overtake its competitors in 2021. This shows that it’s got the potential to do it again, once its overall margins improve, backed by its two growth juggernaut segments.

So, will I be buying more AMD stock then? Well, the Nasdaq-listed firm has got an amazing balance sheet. With a debt-to-equity ratio of 4.5%, Lisa Su’s company is well equipped to traverse an economic downturn.

What’s more, the conglomerate is continuing to grow its market share, which goes to show how well it’s doing despite the tough economic environment. Not to mention, in a world that’s becoming increasingly digital and with cloud computing expanding rapidly, AMD is well positioned to capitalise. It’s no surprise that analysts rate the stock a ‘strong buy’ with an average price target of $84. As such, I’ll be looking to buy more of its shares when I’ve got more spare cash on hand.

The post Is AMD stock a cheap buy? Here’s what the charts say appeared first on The Motley Fool UK.