Investors in AMD (NASDAQ:AMD) face a conundrum. The long-term outlook for AMD stock has never looked better in the company’s 50-year history. More importantly, AMD has taken a technological lead over its long-time nemesis, Intel (NASDAQ:INTC). It has also engaged in a vigorous competition with Nvidia (NASDAQ:NVDA) on the graphics side.
However, both trade- and price-related circumstances have cast doubts over the nearer-term direction of Advanced Micro Devices stock. For these reasons, winning with AMD will take balancing its short-term struggles with the overall success that continues to benefit the company.
The Long-Term Case for AMD Has Never Looked Better
Without a doubt, AMD stock benefits from a rosy long-term outlook. Despite its status as the best-performing equity in the S&P 500 last year, AMD’s renaissance may have only just begun. With a market capitalization of $32 billion, it has a long way to catch up to Intel’s $215.75 billion size. It also remains much smaller than Nvidia, which supports a market cap of around $97 billion.
The financials indicate Advanced Micro Devices stock is expensive, yet inexpensive. What that means is AMD supports a trailing price-to-earnings (P/E) ratio of 120 and trades at more than 18 times its book value. However, its forward P/E currently stands at just over 30.
With analysts projecting earnings growth at 41.3% this year and 55.4% the next, AMD stock appears cheap. Regarding book value, investors should consider that the stockholders’ equity of $1.79 billion increased 150% on a year-over-year basis. Hence, the price-to-book ratio should also continue to fall.
Trade Dispute, Charts Hamper AMD Stock
Unfortunately, market and geopolitical factors have influenced Advanced Micro Devices stock. Due to trade restrictions, the company has stopped switching laptop parts to Huawei. A ban on certain super-computing firms also hits AMD.
Currently, AMD holds a 51% stake in one of the five banned firms, Chengdu Haiguang Microelectronics Technology. We do not yet know the impact such bans will have on earnings. We should have more clarity when the company reports on July 23. Still, we can reasonably assume it will bring a negative impact at some level.
Moreover, AMD stock may have formed a double top. Following the recent deal with Samsung, I predicted that AMD could surge past the $34 per share level. It went on to peak at 30 cents per share above that level a few days later before pulling back. Shares also reached a similar level last fall before pulling back.
Invest Incrementally Tnto Advanced Micro Devices Stock
The math driving AMD stock should force it above $34 per share at some point; the question is when. Furthermore, the U.S.-China trade dispute is hard to predict. The nature of this dispute has led me to believe it will end only when China can find a face-saving resolution to the deal.
Given the conditions, the question should revolve around how, not whether investors should buy AMD stock. Here I would advocate a partial position.
This would mean buying AMD with no more than 50% of the investment cash allocated for that equity. That way, if the trade dispute ends tomorrow, investors can profit. Also, if the AMD stock price falls to $28 per share, $26 per share, or some other support level, investors can buy at a discount.
Concluding Thoughts on AMD Stock
Given the internal success and external challenges affecting AMD stock, investors should take an incremental approach. Under CEO Lisa Su, AMD has finally reached its potential as a competitor to both Intel and Nvidia. With the much smaller size of AMD, the company should enjoy years of high growth as more users choose to run equipment on AMD chips.
However, uncertainty over trade rules has hurt both manufacturing and sales in China. Moreover, AMD’s inability to stay above $34 per share concerns prospective buyers. Theoretically, it limits the likely nearer-term upside when the current AMD stock price stands at close to $30 per share.
In cases such as that, investors might serve themselves best by buying smaller positions now. Going into AMD stock at 50% would allow investors to benefit should the trade dispute end soon. It also leaves capital available to buy if AMD falls further.
Uncertainty may have forced Advanced Micro Devices stock to pause for now. However, with a different approach to buying, investors can make AMD stock investable for both the short and long term.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.