Semiconductor Company Advanced micro-systems (AMD) – Get the Advanced Micro Devices Inc. report. will welcome his Financial Analyst Day June 9. At the event, the company will share updates on its product strategy and roadmaps, as well as growth opportunities and long-term financial goals.
Wall Street analysts are divided on whether AMD stock is overvalued or not. Among the bulls, the Bank of America analyst Vivek Arya believes the stock still has strong upside potential. Here’s why.
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Why Arya Thinks AMD Is “Underrated”
Arya has set a price target of $160 per share for AMD. That would be a 52% gain from the current price of $105 per share. He also projected that AMD would see earnings per share of between $9 and $10 by 2025.
The BoA analyst also wrote that he thinks the market is “underappreciating tailwinds” in AMD’s (GM) gross margins. Currently, the consensus has predicted GMs of 54%, while Arya predicts 60% – more in line with her peers. For instance, Nvidiait is (NVDA) – Get the NVIDIA Corporation report the gross profit margin for the last 12 months was 65.3%.
Finally, the analyst also noted that with strong margins, AMD could become a consistent free cash flow generator. He wrote that the company could revert from its “current narrow perception of a mere Intel (INTC) – Get the Intel Corporation report share mover.”
Is AMD a good buy?
Perhaps the biggest concern about investing in the stock is its seemingly stretched valuation. AMD is currently trading at a price-to-earnings (P/E) ratio of 31.5x, nearly 70% above the industry average. It’s also well above some of its major peers, like Intel, which trades at a modest 8x.
Because it is seen as a growth technology stock, the market has priced AMD based on its future potential, rather than its financial results. However, AMD’s valuation has outperformed its peers due to its strong growth – over 760% over the past five years – and its potential to continue to grow at a considerable pace.
This puts AMD under pressure to continue posting high revenue growth and pushes its valuation higher and higher.
Investors who delve deeper into the semiconductor sector may find cheaper opportunities at the moment.
But keep in mind that AMD’s “stretched” valuation might make sense, given AMD’s forecast. Revenue is expected to grow 60% in 2022, compared to 2021. By comparison, Intel, which trades at a lower valuation, is only expected to grow 1% in 2022.
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