Should You Buy Advanced Micro Devices, Inc. Stock After Yesterday's Pop?

However, things have changed in the last one year or so. In 2016, AMD's revenue grew by more than 7% YoY (compared to 28% decline in 2015) while losses declined by 25%. AMD is expected to deliver 10% revenue growth in 2017 and further narrow down its losses. While AMD still has a huge debt burden, it has improved from the previous fiscal. The company's cash holding has improved from $785 million to $1.2 billion. Its operating cash flow is back to the black from red. While there are still significant risks embedded in the stock (AMD's beta is 2.47), the risk of bankruptcy has declined significantly. The decline in the risks has led to an expansion in AMD's valuation multiple. AMD's PS ratio (ttm) has improved from 0.4 a year back to 3.05, still much lower than NVIDIA's current PS ratio (ttm) of 8 and similar to Intel's PS ratio of 2.91.

Can AMD stock continue to go higher?

The two important factors which determine the stock price are cash flows and discount rate (cost of equity). In the last one year, AMD stock price has been mostly driven by declining discount rate (declining bankruptcy risks). From now on, it will be the improving cash flows which will drive AMD stock higher. The launch of new products like Ryzen CPUs and Vega GPUs will help AMD boost its revenues and profits. Vega could help AMD increase its market share in GPUs while the company can claw back its lost market share in CPUs from Intel. Of course, it will not be logical to expect AMD stock to deliver 2016 kind of returns, but the stock can still go up significantly. Barron's expects AMD stock to double by the year end. However, investors must remember that AMD stock is still a highly volatile (beta of 2.47) play and capable of wild swings in both directions. Having said that, the current risk-reward is in favor of AMD stock. AMD stock is still a good buy. The stock can rally through the Vega preview and launch of Ryzen processors.

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Disclosure: Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a ...

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