What a fantastic six months it’s been for AMD. Shares of the company have skyrocketed 146%, hitting $608.15. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is it too late to buy AMD? Find out in our full research report, it’s free.
Why Does AMD Spark Debate?
Founded in 1969 by a group of former Fairchild semiconductor executives led by Jerry Sanders, Advanced Micro Devices (NASDAQ: AMD) is one of the leading designers of computer processors and graphics chips used in PCs and data centers.
Two Positive Attributes:
1. Skyrocketing Revenue Shows Strong Momentum
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, AMD grew its sales at an incredible 25.4% compounded annual growth rate. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect AMD’s revenue to rise by 66.1%, an improvement versus its 25.4% annualized growth for the past five years. This projection is eye-popping for a company of its scale and implies its newer products and services will fuel better top-line performance.
One Reason to Be Careful:
Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Although AMD has shown solid fundamentals lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4%, lower than the typical cost of capital (how much it costs to raise money) for semiconductor companies.
Final Judgment
AMD has huge potential even though it has some open questions, and after the recent rally, the stock trades at 55.9× forward P/E (or $608.15 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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