Advanced Micro Devices Inc. (AMD) fell 10.21% on July 17 as the Nasdaq 100 sold off 2.94%. Is it a good buy currently?
Cory Mitchell an analyst with Tradequotex.com said, “AMD has been a good overall stock to own. Over the last decade, it has averaged 42.4% annualized returns versus 12.9% for the S&P 500.
“EPS has grown an average of 30.8% per year over the last five years, and analysts project 30.6% yearly EPS growth over the next five years. It is expensive in terms of recent earnings with a Price/Earnings (P/E) of 230. But based on expected earnings for 2024 it is trading at a P/E of 49.
“Based on expected 2025 earnings the forward P/E is 31. However, the problem is that the company’s standardized earnings are usually only a fraction (less than half) of the report/estimated earnings each quarter. Standardized earnings are much lower, and those are what matter. In that sense, the stock is still priced very high.”
Here are the standardized earnings over the last several quarters, relative to reported earnings.
- Q1 2024: $0.07 versus $0.62 reported
- Q4 2023: $0.41 versus $0.77 reported
- Q3 2023: $0.18 versus $0.70 reported
- Q2 2023: $0.02 versus $0.58 reported
Standardized earnings, also called normalized earnings, remove the effects of seasonality and unusual revenues and expenses. They reflect the normal operations of a business and thus provide a more accurate picture of how the company is doing.
Analyst predictions are generally based on reported earnings, which gives an inflated picture of what the company may be able to accomplish.
AMD has a Price Earnings to Growth (PEG) Forward ratio of 1.9. This ratio looks at the current price relative to expected earnings growth over the next five years. Expected growth rates are based on expected reported earnings, not standardized earnings, which means the PEG is likely to be higher based on standardized earnings. A reading of 1 is considered a fair valuation. A reading above one means the stock is undervalued and over 1 means it is overvalued.
For comparison, Nvidia (NVDA) has a PEG Forward of 1. NVDA’s reported earnings are usually quite close to the standardized earnings number.
This doesn’t mean AMD is a bad stock. Nor does it mean the stock price will fall. Stocks can stay overvalued, and get even more overvalued (price rise) for extended periods. It does mean that even with the recent decline in the stock price, the stock still isn’t cheap from a valuation perspective.
From a technical perspective, AMD is also facing an uphill battle. The stock was in a strong uptrend through the latter part of 2023 and early 2024. The price peaked in March and then made a lower swing low in May. Lower swing highs are indicative of down-trending behaviour. The price did recover in May and June but the recent decline is pushing the price back toward prior swing lows as the chart below shows. The stock is still exhibiting some down-trending behaviours.
