They say time heals all wounds but, as anyone over 60 knows, time also wounds all that has healed. By that I mean that things change, trends reverse — nothing works all the time. Since 2016 Advanced Micro Devices (NASDAQ:AMD) has worked great. You could have gotten it for under $2 per share in early 2016. It opened Dec. 3 at $37.34.
That’s not a 10-bagger, as the stock traders down at the dog track say. That’s nearly a 20-bagger. AMD is worth 18.5 times more than it was then. But no trend goes on forever, and no stock rises to the sky.
Is it time to take profits?
It Might Be Time for Reversal
Much of AMD’s success in recent years has been at the expense of Intel (NASDAQ:INTC), which has lumped along, barely able to keep up with the Nasdaq Composite average. Intel’s still not small. It has a market capitalization of $243 billion. Intel shareholders are also getting a steady flow of dividends, 31 cents per share most recently, while AMD owners just get capital gains.
Lately, analysts have been down on both stocks. Both seem overbought. Analysts who confidently predicted an end to 2018’s chip inventory recession now think they overestimated the rebound. The trade war continues. China will damn anyone who doesn’t agree that it controls Taiwan, even though it doesn’t. It’s a huge flash point.
In the marketplace, AMD is still kicking Intel’s rear. Each Intel comeback effort is met by a new AMD technology. Advanced Micro Devices is up 15% since reporting earnings in October, but Intel is up only 2% in that same window.
But there can be a difference between what is happening in the marketplace and what should be happening in the stock market.
AMD Is Overvalued
By any conventional measure, Advanced Micro Devices is overvalued here.
Chip makers shouldn’t be selling at 7.2 times sales. AMD is having good times, but its earnings are only up 35% from 2015, and its great September quarter saw earnings of just 11 cents per share. Even if it kept that pace for a full year, which it never does, you’re looking at 84 times earnings. The actual price-to-earnings ratio is closer to 200.
At the end of September AMD still had just $1.2 billion in the bank. That’s enough to cover its $864 million in long-term debt, but the company is still generating negative free cash flow. Even with the wind at its back for three years running, Advanced Micro Devices can’t take full advantage.
It’s true that the company is fab-less, meaning it owns no fabrication plants. Intel is on the hook for 15 manufacturing plants, four of them in the United States. For manufacturing AMD relies on Taiwan Semiconductor (NYSE:TSM), which as the name implies, is in Taiwan. Which according to China, is in China.
In short, Advanced Micro Devices is running without a net. Intel would be clobbered if the trade war turns hot, because it still has a production facility in Dalian, China. AMD would be out of business.
The Bottom Line on Advanced Micro Devices
When you look at your stock holdings, know that those gains your broker lists aren’t real. You don’t have a profit until you sell and the money is in your hand.
Advanced Micro Devices has had a great run, but these are troubled times for the world. AMD shares tried, and failed, to hold the $40 level recently.
If you have been in AMD for the last few years, take some money off the table. If you are thinking of getting back in, see how the next few months shake out first. AMD is still a great company, just not at these prices.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.