AMD: The Growing Bubble (NASDAQ:AMD)

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Summary

AMD reported sub-par earnings for Q4 2018.
Shares rallied significantly despite the meager results.
If current trajectory continues, the stock is likely headed for a cliff.

Photo by Marc Sendra Martorell on Unsplash

Investment Thesis

There was nothing in the latest AMD (NASDAQ:AMD) earnings report that justified the stock price much less a 26% subsequent rally.

This wouldn't be the first time the buyers got it wrong.

As can be seen in the above chart, the stock has been bid up unreasonably on multiple occasions only to dive subsequently. Latest spike was as recent as a few months ago.

The Results

AMD reported mostly in line for Q4 2018, but the all-important guidance for Q1 2019 missed badly. Not only the top-line guidance missed the estimates by over $200 million but also came in 12% lower QOQ and 24% lower YOY. That is very significant for a company with stratospheric valuations based on supposed "high growth".

Bulls point to a 9% expected yearly growth in 2019 as a positive sign, but that is not nearly enough to classify AMD as a high-growth company. In fact, growth rate is actually decreasing by 14%. That would normally spell disaster for a growth stock, but analysts and buyers are once again giving AMD a pass.

Quick Comparison

By comparison, Nvidia's (NVDA) revenue outlook for Q4 2019 represented a 15% QOQ decline and a 7% YOY decline. The stock sank 25% in the 2 days following the latest ER. The contrast is astounding.

Nvidia subsequently revised the outlook lower, and the stock dropped another 18% as a result of the revision.

Keep in mind that Nvidia is not nearly as expensive as AMD and consequently not priced for as much growth. Let's compare the valuations of the two companies.

The table below shows the trailing P/E for the two companies.

As you can see, AMD is 4 times more expensive. Trying to predict future earnings from the revenue guidance is a little tricky, but below is an attempt.

Data Source: Company filings

Starting with the 9% increase, the expected revenue for 2019 would be $7.063B. A 4% increase in gross margin between 2017 and 2018 resulted in a 6.03% net profit margin increase. Another 4% in gross margin for 2019 would yield a net profit margin of 11.03% for 2019, which results in $779M in income.

The market cap as of this writing is $26.41B. The resulting forward P/E using the above calculations would be 34. If the stock price and share count are frozen, it would take about two years for the P/E to reach the current Nvidia P/E.

These are not valuations that justify a 26% rally after a sizable outlook miss.

Takeaway

AMD is a risky hold at these prices. As a cult stock, we would not recommend shorting it as loyal fans can push it considerably higher before the drop. For ourselves, we normally don't short stocks but decided to initiate a long position in put options. This is admittedly a risky bet, but given the long expiration date, it may provide a good ROI.

Disclaimer: The author is not a financial adviser. The information contained in this article is not guaranteed to be accurate or reliable. The information provided is informational only and should not be construed as a recommendation to buy or sell certain instruments (equities, derivatives, etc.), or to enter into any other kind of financial transaction. Please do not rely on this information as the basis for any financial decision. All financial transactions including investments contain risks and can lead to significant losses.

This article was written by

TickerSquare

575 Followers

To TickerSquare the stock market is an irresistible enigma begging to be solved. Fully aware of being outmatched by an ever-evolving market, the battle must go on as more data is collected, more information is gathered, and more numbers are crunched. In the end, victory is measured by those rare moments when an unexpected move is expected or when blindsided, research has paved the way to adequate preparation for mitigating catastrophe.

Analyst’s Disclosure: I am/we are short AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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