Despite This Big Drop, Overvalued AMD Stock Has More Downside

Stocks to sell

The recent sell-off means an end to the runaway bull market. What does that mean for past high-flyers like Advanced Micro Devices (NASDAQ:AMD)? The semiconductor giant’s shares more than doubled in 2019. As we entered 2020, AMD stock on a trajectory to even more upside. But, with coronavirus first threatening the global economy, the company’s near-term prospects may not be as bright as valuation suggests.

Despite This Big Drop, Overvalued AMD Stock Has More Downside

Source: Joseph GTK /

Granted, with the recent drop from nearly $60 per share down to under $40 per share, AMD’s valuation has fallen. Yet, with a forward price-to-earnings (P/E) ratio of 38, shares remain richly priced, even compared with competitor Nvidia (NASDAQ:NVDA). Nvidia shares now sport a forward P/E of 31.1.

This valuation could be sustainable. As long as sales and earnings growth stays on track. As InvestorPlace’s Mark Hake discussed, the company’s Financial Analyst Day presentation announced strong revenue but flat earnings growth in 2020. AMD may be making the right moves to gain more market share from Intel (NASDAQ:INTC). Yet, that may not translate into near-term upside.

High expectations drove this stock’s rally from November 2019 until the sell-off began. With reality sending speculators back to Earth, it’s hard to expect AMD stock to recover anytime soon. Let’s dive in, and see why shares remain a sell in the near-term.

Why AMD Stock Could Head Lower

As mentioned above, the company recently held a Financial Analyst Day. In one of the presentations, CFO Devinder Kumar discussed the company’s financials. Titled “Sustainable Growth,” this slide-deck touted AMD’s revenue growth success since 2017. It also highlighted the company’s margin expansion and earnings growth.

Updated guidance from the presentation projects 28%-30% sales growth and continued margin expansion. And that’s why many in the analyst community continue to love AMD stock. The analyst day updates prompted Piper Sandler’s Harsh Kumar and Cowen’s Matthew Ramsay to raise their price targets.

Yet, as this commentator recently discussed, continued high expectations could be a concern. If First Quarter 2020 (ending March 2020) results fall short of projections, full-year guidance could be reduced.

What does that mean for AMD stock? Simply put, further downside. I don’t expect shares to fall back to levels seen in 2017 (between around $10 to $15 per share). But, shares could fall to back where they were last fall (under $30 per share). With this in mind, we’re far from a bottom.

On the other hand, don’t be too bearish on the company’s near-term prospects. Even with coronavirus headwinds, the company could surprise, allowing shares to stabilize. Or even appreciate from today’s price level.

How Shares Could Rebound

In a recent article, InvestorPlace’s Luke Lango highlighted a key reason why AMD could rebound. It makes sense to fear coronavirus’ impact on Chinese supply chains and global chip demand. But, these fears could be short-lived. Coronavirus has yet to peak in North America and Europe. However, China is entering recovery mode.

A quick rebound, first in China, then in the rest of the world, could mean a quick recovery for AMD stock. Yet, with economists ruling out a V-shaped recovery, how realistic is this optimism? The odds favor a U-shaped, or even worse, an L-shaped recovery.

But all of this is speculation. It won’t be until late April (at the earliest) that we’ll see the company’s Q1 2020 results. Also, what’s to say AMD is going to see sales declines? Growth could fall short of expectations and still be up year-over-year.

Diminished demand doesn’t rule out continued market share gains. The company’s clear technological advantages over its larger rival could mean they see less of an impact from a weak chip market. But this positive factor remains priced into AMD stock. At least at current levels. If shares fall back down to $30 per share and below, a true “buy the dip” situation could emerge.

Bottom Line: Don’t Get FOMO, Sell AMD Stock

The problem with AMD stock is not the underlying business. It’s valuation. The company has a compelling growth story. But, exuberance got the better of investors, sending shares to “priced for perfection” valuation levels.

Now, with the market maelstrom, shares are heading back to earth. At the current trading price, they remain overvalued. Yet, don’t expect shares to fall back to the single digits. At a lower price level ($20 to $30 per share), AMD may be a bargain relative to its growth.

But there’s no guarantee the company’s projected 20%-plus growth can continue in tougher times. Uncertainty and diminished confidence will continue to impact share performance. In short, all signs point to further near-term downside.

Bottom line: sell AMD stock. Don’t get FOMO and “buy the dip.” With shares likely to tumble further, there’s nothing you’re missing out on.

Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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