Is Advanced Micro Devices Stock Overvalued or Undervalued?

A chip the size of a coin, developed by AMD is displayed during a press conference held in Taipei, Taiwan, on May 24, 2011. Sam Yeh/AFP via Getty Images

Advanced Micro Devices Inc. shares have outperformed the S&P 500 in 2021, generating a year-to-date total return of 581.4 percent.

But after AMD’s huge 2021 performance, investors may be wondering if there’s any value left in the stock heading into 2022.

Earnings

A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 29.1, nearly double its long-term average of 15.9. AMD’s PE is 41.9, more than 40 percent higher than the S&P 500 average as a whole.

Growth

Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 21.2. AMD’s forward earnings multiple of 40.7 is still nearly double the S&P 500’s, making AMD look overvalued.

AMD’s forward PE ratio is also significantly higher than the average multiple of its technology sector peers, which are averaging a 26.9 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren’t everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process.

The S&P 500’s overall PEG is currently about 1.0; AMD’s PEG is 1.19, suggesting AMD is reasonably valued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.16, well above its long-term average of 1.63. AMD’s PS ratio is 10.9, triple the S&P 500 average as a whole.

AMD’s PS ratio is also up 447 percent over the last five years, suggesting the stock is priced at the high end of its historical valuation range.

Finally, Wall Street analysts see little value in AMD stock over the next 12 months. The average analyst price target among the 33 analysts covering AMD is $140, suggesting just 2.4 percent upside from current levels.

Verdict

At its current price, AMD stock appears to be overvalued based on a sampling of common fundamental valuation metrics.

By Wayne Duggan 

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