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Though the last few months have been rough going, Advanced Micro Devices (NASDAQ: AMD) stock ended 2018 sporting a nearly 80% gain. Share prices are off their highs reached during the fall, though, as the company's sales momentum has slowed and a broader stock market sell-off has taken its toll. Though the chipmaker is still forecasting growth ahead, investors should use caution here.
2018 momentum is fading... for now
AMD's big gains last year are easy to explain: New demand for the company's products for video gaming, personal computers, laptops, and data centers led to much higher sales compared to a year ago.
| Metric | 9 Months Ended September 29, 2018 | 9 Months Ended September 30, 2017 | YOY Change |
|---|---|---|---|
| Revenue | $5.06 billion | $3.91 billion | 29% |
| Gross margin | 37.8% | 34.1% | 3.7 p.p. |
| Operating income | $423 million | $129 million | 228% |
| Adjusted EBITDA | $651 million | $310 million | 110% |
YOY=year over year. P.p.=percentage point. EBITDA=earnings before interest, tax, depreciation, and amortization. Data source: Advanced Micro Devices.
Sales and profit increases led to the stock's meteoric rise, but third-quarter results indicated a slowdown for AMD. Sales were up only 4% year over year, and adjusted EBITDA was up 23%. That's nothing to balk at, but nevertheless was much slower than the previous few quarters' results. Management sees sales increasing 8% year over year in the fourth quarter, and gross margins rising to 41%.
The cooldown is in keeping with an overall slowdown in momentum for semiconductor companies that occurred in 2018. It all started with memory chips, an especially up-and-down concern, but other chipmakers got hit, too. AMD was no exception, as was the case for its peer NVIDIA (NASDAQ: NVDA), which took an especially hard tumble as demand for graphics chips related to the cryptocurrency boom last year wore off. That's a headwind that AMD has acknowledged is weighing on results right now, too, and could persist for a couple more quarters.
Image source: Getty Images.
A big pullback, but still not cheap
Despite a steep drop the last few months from its high point, AMD still isn't a cheap stock. Trailing price to earnings is at 56.9, and one-year forward price to earnings is 30.5 -- supporting Wall Street's expectations that bottom-line profits will continue to improve in the immediate future. Even with the more modest sales growth outlook from management, AMD could certainly pull off another big year of bottom-line increases if its profit margins keep rising as anticipated.