The bears may have control, but playing the long game on AMD stock is still a solid move
Advanced Micro Devices (NASDAQ:AMD) is illustrative of how quickly sentiment can turn. From the onset of the Covid-19 pandemic to the end of November 2021, AMD stock climbed 290%. The pandemic was a super cycle event for chip makers. But super cycles come to an end, and AMD isn’t being spared by the tech selloff. The company’s stock is down 50% from its all-time high. And it seems as if, in the short term, the bears have the upper hand.
However, if you have the patience to play the long game, AMD stock looks like a solid buy. The company has solid fundamentals and it sells into the most highly sought-after sectors of the market including data center and professional graphic processing units (GPUs), and semi-custom System-on-Chip (SoC) products, and technology for game consoles.
AMD Will be Just Fine No Matter What Congress Decides to Do
Some of the noise is coming from the debate over whether Congress will pass the $52 billion chip bill. And there have been reports that AMD along wih Nvidia (NASDAQ: NVDA) are balking at the favorable treatment Intel (NASDAQ: INTC) will receive from the bill.
Intel, which manufactures its own chips stands to reap benefits from the CHIPS Act as it looks to build factories in the United States. It would also benefit from a separate piece of legislation, the FABS Act that would allow the company to purchase tools for use inside those factories.
With that said, objection from chip companies like AMD (who doesn’t manufacture its own chips) is to be expected. But it’s mostly irrelevant. The fact is that Advanced Micro Devices books its chip production years in advance based on expected demand. And, the company also focuses on smaller, more advanced chips that provide the additional benefit of having higher margins.
In fact, the company is forecasting average revenue growth of approximately 20% over the next five years. And earnings per share are expected to grow an average of approximately 24% in that same span.
That’s not as strong as the 65% revenue gain the company achieved from 2020 to 2021, but it’s enough to justify the stock’s current valuation at around 30x earnings.
Should You Buy AMD Stock?
I would be lying if I said I knew what the outlook for AMD stock was for the rest of 2022. There is a lot of bearish sentiment on growth stocks in general, and chip stocks in particular. And if consumer demand is as weak as some analysts believe it will be, then a chip shortage could turn into a chip surplus.
However, investing is often about playing the long game. And right now, that means looking at stocks that offer solid fundamentals and the opportunity for future growth. The analysts surveyed by MarketBeat give AMD a consensus price target that shows a hefty 58% gain from its price of $81.28 at the time of this writing. Plus, institutions have been buying a healthy amount of AMD stock which means it’s likely to be a holding in many of the popular mutual funds and ETFs held in retirement accounts.
All of this is to say, Advanced Micro Devices looks to be a quality stock in a sector that will always have its share of volatility. But if you have the stomach for a little volatility, taking a small position in AMD stock now is likely to pay off down the road.