Imagine waking up to see AMD (NASDAQ:AMD) down 30%. Sounds ridiculous? It’s not. We aren’t talking about a single day drop – but sustained selling triggered by risks that are piling up leading to a big reset in valuation. If this stock reverts to anything close to a sane multiples, we’re talking a drop to $60 or even lower – and that’s without a full-blown tech meltdown.
That’s the kind of risk that exists with individual stocks, or if your portfolio is too concentrated. We minimize this risk while giving exposure to upside in our High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Let’s pull back the curtain on AMD.
Investors Are Expecting Google-Like Margins? Not Going To Happen
Just from the numbers that matter, AMD looks a lot like Google at first glance.
- Growth: Almost the same with AMD at 13.7% and Google at 13.9% in the last 12 months
- PS (price to sales) Ratio: Very similar with AMD at 5.6 and Google at 5.4
- Leverage (Debt to Equity ratio): Indistinguishable: 1.5% vs 1.3%
But PE multiples? Different like night and day. AMD is trading almost at 85 PE while Google is sitting below 19. Why such a massive difference? The answer: margins!
AMD has a very low net margin of 6.4% compared to Google’s 28.6% (last 12 months) – which means low income and exceptionally high PE. In other words, the market is expecting significant margin expansion from AMD – but that dream might blow up. Here is what the numbers really mean.
- AMD isn’t profitable enough to justify its stock price.
- It isn’t growing faster than other Big Tech players.
- And it certainly isn’t insulated from macro shocks.
So what’s propping it up? Expectations. And those are starting to wobble.
Earnings Guidance Could Detonate the Hype
Sure, earnings might look “fine” on the surface. But watch the guidance like a hawk. That’s where the truth slips out.
- Tariffs: AMD expects an $800 million hit from new China export restrictions. That’s not background noise – China makes up nearly 25% of its revenue.
- Competition: Nvidia still owns the high-performance GPU mindshare. Intel is coming back in CPU. Even Amazon and Google are building their own chips.
- Industry downturn: JPMorgan and Morgan Stanley are already sounding the alarm: a semiconductor downcycle is underway.
If AMD blinks even a little in forward guidance, Wall Street’s love affair could end fast.
The Cycle is Turning. And It’s Not on AMD’s Side.
The semiconductor industry isn’t new to booms and busts. We’ve seen this movie before.
- Sky-high valuations during hype cycles.
- Margin dreams that don’t materialize.
- And stocks that drop 30-50%
AMD is not immune. Remember 2022? AMD dropped from $160 to under $60 in just months. And it wasn’t because AMD failed – it was because the expectations collapsed. That wasn’t the only time this happened. In 2018, AMD dropped nearly 50% in < 1.5 months as the market corrected in October. All we are saying is – stay cautious!
Does it mean you shouldn’t invest in stocks like AMD? No, we aren’t saying that. AMD has provided excellent returns for investors. But stocks like AMD should be just a small part of the portfolio. There is much more to long-term money compounding. Consider Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
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