Credit has to be given where it’s due. Advanced Micro Devices CEO Lisa Su has orchestrated the turnaround she intended to when she took the helm in 2014. The company was largely left for dead by then, but beginning in 2016, revenue turned around well enough to push AMD back into the black in 2018. The future looks bright enough too, prompting not one but two big analyst accolades this year already. A little over a week ago, Instinet analyst David Wong reiterated his buy rating, but ratcheted up his price target from $40 to $58 on expectations that Advanced Micro Devices would become even more competitive this year. Just a couple of days ago, Mizuho’s analyst Vijay Rakesh upgraded AMD from a neutral stance to a buy, touting its prospects for gaining market share in a recovering server market. An impressive showing at this year’s annual Consumer Electronics Show bolstered the new optimism. The pair of analysts and the investors that followed their lead may well be right, too. Although Advanced Micro Devices was the S&P 500’s biggest winner in 2019 with its 148% advance, 2020 could be another big one for the company’s shareholders. Investors who are just now stepping into — or back into — this technology name, however, are ultimately making three dangerous bets they may not even realize they’re making.
Bet #1: Valuations don’t really matterDo earnings valuations actually affect a stock’s performance? The jury is still out on the matter. Warren Buffett has done well by scooping up stocks at historically cheap prices, but thorough statistical analysis repeatedly struggles to correlate market-beating performance with low P/E ratios. The truth is likely to be somewhere in the middle of the two extremes, meaning it is possible to overpay for a stock, but impossible to know if and when you’re doing so. To the extent valuations do matter though, Advanced Micro Devices offers the least amount of upside among any of the major tech hardware names. That’s the case on a near-term and long-term basis.
|Company||Trailing 12-Month P/E||Projected 2020 P/E||Projected 2020 P/E|
|Advanced Micro Devices (NASDAQ:AMD)||256.4||44.1||32.0|
|Texas Instruments (NASDAQ:TXN)||24.4||26.2||23.2|