AMD Stock Popped After Earnings, Then Gave It All Back. Is It a Buy Now?
AMD(NASDAQ: AMD) reported third-quarter earnings on Nov. 3, and the stock rose sharply after hours, up around 8%. However, over the next day, the market was less and less impressed with the results, and AMD ended Nov. 4 up only about 1% -- less than the S&P 500(SNPINDEX: ^GSPC) rose. So, what caused the market to change its mind after a strong reaction?
I think investors are looking at AMD as a whole, rather than just a single quarter.
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The reality is that AMD's stock has risen tremendously fast this year, far outpacing its business growth. This mismatch has vaulted AMD's stock into expensive territory, and that reality is apparently becoming clear to investors.
AMD sees strong data center growth ahead
First, let's digest the quarter. AMD makes all types of computing units, ranging from data center GPUs to consumer hardware to embedded chip processors. However, the big cash cow is its data center business, which is growing rapidly. During Q3, AMD's data center business rose 97% year over year to $8.5 billion. However, this still represents a slowdown from the 107% growth seen in Q2. Furthermore, data centers are only a part of AMD's business. AMD's overall revenue totaled $13.4 billion, up 45% year over year. So, AMD is being held back by its other business units.
Looking ahead, AMD expects strong growth. It expects data center revenue to double year over year in 2027 -- indicating that its growth in this area will remain strong. That's great news for investors, as it suggests AMD's overall growth rate will likely increase. With its data center division growing faster than the company overall, it will start to make up an ever larger share of AMD's total. With it having a greater effect, AMD's overall growth rate will move closer to the data center unit's.
This is great news, but it's also required, as AMD's stock has a lot of future growth priced in.
AMD isn't a cheap stock
Right now, AMD is one of the more expensive stocks on the market.
AMD PE Ratio data by YCharts
Priced at 106 times trailing earnings, AMD's stock is expensive no matter how you slice it. The company needs to grow its way into a more reasonable valuation. One way AMD is doing this is by improving margins. Each quarter over the past few years, AMD's profit margins have trended up. However, they are starting to go a bit sideways.
AMD Profit Margin (Quarterly) data by YCharts
AMD used to have two catalysts for growth: revenue and margin expansion. If the second catalyst has reached its endpoint, that could be an issue for the stock's investment case. However, by using forward earnings to value the stock, an investor can gauge how much growth is already baked into AMD's stock price.
I'd call 30 times trailing earnings a fair price to pay for AMD's stock. At 30 times 2027's earnings estimates, that means all of 2027's expected growth is currently priced into the stock.
AMD PE Ratio (Forward 1y) data by YCharts
While it may sound reasonable to have a year's worth of growth priced in, there are other companies, like rival Nvidia, that trade for 12.6 times next year's earnings estimates. That huge gap highlights how expensive AMD is.
As a result, AMD may have a bright future and has delivered solid results, but it's far more expensive than other stocks in its category. I think investors are better off steering clear of AMD and looking at other AI stocks, because there are several that are great values right now.
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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy .
AMD Stock Popped After Earnings, Then Gave It All Back. Is It a Buy Now? was originally published by The Motley Fool
