Is Advanced Micro Devices a Buy?

Advanced Micro Devices (NASDAQ: AMD) stock has been on an impressive double-digit run since the company reported first-quarter 2018 results in late April. The catalyst was the chipmaker’s 40% increase in revenue from a year ago, providing a massive boost to the bottom line. However, shares have recently pulled back, and more retreat may be in order.

AMD making waves

Graphics and computing processors have provided the biggest bump to business in the past year, rising 95% and comprising 68% of total sales at the start of 2018. New products geared toward gaming have been a hit, but these chips are also finding use in the cryptocurrency industry. Cryptocurrency “mining” requires the use of graphics cards, and AMD’s Radeon lineup has been a top choice among digital currency miners. AMD said it believes 10% of its total revenue came from this market during the first quarter.

Another positive trend that has helped AMD as of late involves its new EPYC data center chips. In the most recent quarter, server revenue grew by double digits from the prior quarter, and data center processor unit shipments doubled. It’s still a very small segment of AMD’s total business, but even Intel (NASDAQ: INTC), the shadow that AMD lives under, recently acknowledged that the new EPYC lineup has the potential to make some serious headway in the data center industry. Intel’s Data Center Group grew 24% in the first quarter to $5.2 billion, so there is plenty of room there for AMD to make advances.

Image source: Getty Images.

Too much, too fast?

The problem here is that, in spite of impressive gains, AMD is still just barely profitable. Its trailing-12-month price-to-earnings ratio is 105, and on a 12-month forward estimate it’s at 26. That implies further big gains are ahead for the bottom line.

It’s possible that could transpire, as the product types mentioned earlier helped push the chipmaker higher in recent months. During the second quarter, AMD management expects a 50% year-over-year increase in revenues and an advance in gross margin to 37% from 36% in the first quarter. That strong outlook is what helped the stock pop in the first place.

Not everything has been a win, though. The company’s new Ryzen chips for laptops are off to a slow start, as Intel still owns a vast majority of that market. Embedded and semi-custom revenues also didn’t notch a great quarter, falling 12% year over year in the first quarter.

Perhaps most concerning, though, are those sales to the cryptocurrency industry. AMD got a boost in the last year, not just from graphics-card unit sales, but also from their higher average selling prices due to high demand and short supply. However, where there is success there is also competition, and a number of graphics processors specifically designed for cryptocurrency mining are coming out. Sales momentum is apparently cooling off, causing rival graphics-card maker NVIDIA to call for a slowdown in that department. Thus, with 10% of total sales coming from digital currencies, a tough stretch may be ahead in a market that’s been a catalyst for growth in the last year.

AMD stock has had a great run the last two months, but I fear that expected momentum in the quarters ahead has now been priced in. Rather than chasing the hot performer, I think prudence is wiser.

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Nicholas Rossolillo owns shares of NVDA and his clients own shares of Intel. The Motley Fool owns shares of and recommends NVDA. The Motley Fool has a disclosure policy.

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