AMD's stock jumped after its third-quarter report, then lost most of the gain within a day. Motley Fool analyst Keithen Drury argues that a high valuation, not the results, explains the shift.
AMD shares rose about 8% after hours once the company reported third-quarter earnings on Nov. 3. Over the next day, though, the market grew less impressed, and AMD ended Nov. 4 up only about 1%, less than the S&P 500 gained.
Drury, a contributing Motley Fool technology analyst, thinks investors are weighing AMD as a whole rather than a single quarter. He writes that the stock has risen tremendously fast this year, far outpacing its business growth.
Data center growth slows from Q2
The data center business is AMD's main cash cow. In Q3 it rose 97% year over year to $8.5 billion, a slowdown from the 107% growth in Q2.
Overall, AMD's revenue totaled $13.4 billion, up 45% year over year. Drury says other business units are holding the company back.
Looking ahead, AMD expects data center revenue to double year over year in 2027. Drury says that would likely lift the company's overall growth rate, since the division would make up a larger share of the total.
Valuation leaves little room
Drury calls that outlook required rather than a bonus, because the stock has a lot of future growth priced in. AMD trades at 106 times trailing earnings, which he considers expensive however it is sliced. He also notes that profit margins, which have trended up each quarter for the past few years, are starting to go a bit sideways.
By Drury's yardstick, 30 times is a fair price to pay. At 30 times 2027 earnings estimates, all of 2027's expected growth is already priced into the stock. Rival Nvidia, by comparison, trades at 12.6 times next year's earnings estimates, a gap he says shows how expensive AMD is.
His conclusion: AMD has delivered solid results and may have a bright future, but investors are better off looking at other AI stocks.
Source: The Motley Fool
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