Stocks to sell

The Optimism Over AMD Stock Is Getting Out of Hand

What’s your gut feeling, now that Advanced Micro Devices (NASDAQ:AMD) stock has blasted past its 2021 peak? Are you enthused and ready to buy, or concerned that stock traders and analysts are too optimistic now? Your response says a lot about you as an investor, and if you’re a true contrarian, then you might want to take profits even if you feel bullish about AMD for the long term.

AMD, was a darling of the financial market in early 2023 is highly favored again in early 2024, showing that the market often works in cycles. Just remember, just as there are up cycles, there are also down cycles. Currently, it feels as if everybody and his uncle is ultra-confident about AMD’s growth prospects. This could be a recipe for a letdown. AMD’s valuation is so inflated that it could pop like a balloon.

They’ll Use Any Excuse to Buy AMD Stock

When a stock is in favor on Wall Street, traders will use practically any excuse to buy it. A case in point happened in mid-January, when AMD stock rallied despite the lack of company-specific news.

There was news in the general semiconductor sector, but it came from halfway across the world. Specifically, Taiwan Semiconductor (NYSE:TSM) forecast that its revenue growth will be in the low- to mid-20s percentage-wise. That’s above the expectation of around 10% global chip-market revenue growth.

Apparently, eager traders gobbled up AMD stock because Taiwan Semiconductor supplies chips for U.S. chip makers, including AMD. That’s fine if you already owned the stock and profited from the share-price spike.

However, if you didn’t already own the stock, then you missed the rally and now, both Taiwan Semiconductor and AMD have to live up to the market’s elevated revenue-growth expectations.

That’s a tall order, and since the market is cyclical, the widespread optimism surrounding the artificial intelligence chip industry can’t persist forever.

You Won’t Believe This Number

After the approximately 130% gain in AMD stock last year (from around $65 to $150, give or take a few dollars), it shouldn’t be surprising that analysts are scrambling to raise their price targets. They practically have no choice about it.

KeyBanc Capital Markets analyst John Vinh, for instance, raised his AMD share-price target from $170 to $195 recently. Vinh hiked his 2024 demand estimate for AMD’s MI300 AI chips to as much as $8 billion, from his prior forecast range of $3 billion to $4 billion.

Vinh was evidently glad to praise AMD, observing “a meaningful inflection in demand for MI300X.” Equally effusive was TD Cowen analyst Matthew Ramsay, who predicted that the “potential of MI300 within the AI TAM [total addressable market] is still ahead for AMD with potentially large upside over the next couple years as an increasingly capable GenAI alternative.”

That’s a mouthful, and it came with a sizable price-target raise. Ramsay previously expected AMD stock to reach $130, but now he’s looking for $185.

If you’re a contrarian investor, you may bristle at the ultra-optimistic consensus associated with AMD. You’ll bristle even harder when you discover that AMD’s GAAP-measured trailing 12-month price-to-earnings ratio is 1,353x. That not a misprint, and neither is AMD’s trailing price-to-sales (P/S) ratio of 11.69x (a more acceptable P/S ratio would be below 3x).

AMD Stock: Don’t Press Your Luck

I could have continued my argument with AMD’s lofty price-to-book (P/B) ratio and other valuation metrics. Yet, you surely get the idea by now. Buying a richly valued stock like AMD offers a very different risk-to-reward scenario compared to buying at low prices.

In other words, I don’t recommend pressing your luck with AMD stock at its currently stretched valuation. Besides, contrarian investors should wonder whether too many stock traders and analysts are optimistic about AMD now. Therefore, it’s perfectly fine to take partial or full profits if you’re not comfortable investing in AMD.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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