Advanced Micro Devices (NASDAQ:AMD) has been a champion in the past few years, a champion in the semiconductor industry, and a champion in the pandemic. However, all of the successes it has had have also led to the current overvaluation of AMD stock.
While it is well positioned, the company also competes in a volatile, highly competitive industry. Legacy chip maker Intel (NASDAQ:INTC) dictates much of the industry’s direction still and exerts strong influence with deep pockets. It, along with Nvidia (NASDAQ:NVDA) are often mentioned in the same breath as AMD competitors. Rightly so. However, deep-pocketed cloud computing giants for which AMD has traditionally been a supplier, are quickly becoming competitors. Risks in the microchip industry are many, and AMD is hemmed in on all sides. But it is well-positioned to continue its winning ways.
AMD Stock Is Driven By Two Revenue Sources
AMD is where it is precisely because of its prowess. The company earns revenue from two primary categories: Computing and Graphics, and Enterprise, Embedded and Semi-Custom segments. And the remainder of 2020 looks promising in regard to projects therein.
AMD’s problem probably isn’t going to be creating revenue for the rest of 2020, but rather, maintaining its massive valuation and warding off competitors looking to erode its competitive positions. AMD probably can’t expect its meteoric price appreciation to continue and markets will adjust the valuation of AMD stock sooner or later.
Investors into AMD shares should know that price appreciation can likely only occur from fundamental improvements to its financial factors. Top line revenues and bottom line profits are going to be key.
Markets have already given it massive valuation. AMD’s price-earnings ratio is 121.72 at its price of $52.34 in early July. For comparison, Intel and NVIDIA trade at prices of 11.4 and 71.8 times their earnings, respectively.
Median values for P/E ratios in the semiconductor…