Could AMD Be a Millionaire-Maker Stock?

Semiconductor designer Advanced Micro Devices (NASDAQ: AMD) has been on a roll in recent years. The stock has gained 1,670% since the start of 2016 and 304% over the past two years alone. If you invested $50,000 in AMD five years ago, you're holding a position worth $1.07 million today.

AMD is already making millionaires out of ordinary long-term investors, but how much further can the stock rise?

Realistic expectations

A $50,000 investment in AMD is not likely to make you a millionaire. Repeating the stellar returns of the last half-decade would push AMD's share price above $900 per stub and the market cap would pass a trillion dollars.

That's simply not a realistic five-year goal, and it's rather unlikely that AMD will reach that kind of rarefied air in the foreseeable future. If AMD makes any more millionaires at this point, they'll have to start from original AMD investments far larger than $50,000.

Line drawing of a rocket taking off from an outstretched hand.

Image source: Getty Images.

Growth drivers

AMD is operating under a highly competent team, led by CEO Lisa Su, and the company rarely makes a mess of its business plans these days. AMD is stealing market share from NVIDIA (NASDAQ: NVDA) in the graphics processor market while taking advantage of a rare manufacturing process advantage to poach desktop and server processor sales from Intel (NASDAQ: INTC).

AMD will also benefit from the introduction of new video game consoles this fall. Both the Sony (NYSE: SNE) PlayStation 5 and Microsoft (NASDAQ: MSFT) Xbox Series X will be based on custom versions of AMD's graphics and core processors, just like the Xbox One and PlayStation 4 generation.

Looking beyond these short-term sources of potential stock fuel, I like the way AMD is investing in its own future. The research and development budget is growing faster than AMD's incoming revenues, and the same goes for its capital expenses. In other words, AMD is doing its level best to support innovation and new ideas. That's a fantastic way to run a high-tech company like AMD:

AMD Research and Development Expense (TTM) Chart

AMD Research and Development Expense (TTM) data by YCharts.

How much longer can AMD stay perfect?

So AMD has a lot going for it, but investors have already priced most of these advantages into its current stock prices. The optimistic projections may already have raced too far, too fast.

The stock is trading at nosebleed valuation ratios like 253 times trailing earnings and 26 times the company's book value. In other words, AMD's stock is priced for perfection, and any misstep along the way could trigger a massive crash.

Now, AMD has surprised me before. I made the same "priced for perfection" argument in 2017 and the stock has nearly quadrupled since then. Pulling the same trick on me today would make AMD's market cap comparable to sector giant Intel, whose annual revenues are 12 times larger than AMD's. Intel's profit margins are also much wider than AMD's, resulting in far richer earnings and cash flows.

Predicting that AMD will pass Intel as the preeminent processor provider might make sense from an extremely long-term point of view, stretching across several decades. That's a fine argument for holding an AMD position, but you're very likely to see the stock take some major haircuts along the way.

So this is a classic growth-stock dilemma. Yes, AMD might be able to create long-term wealth for its investors, but this is probably not the best time to start a position in the stock due to an extremely bumpy road ahead. Even long-term AMD bulls may want to wait for the next price drop before backing up the truck.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Intel. The Motley Fool owns shares of and recommends Microsoft and NVIDIA. The Motley Fool recommends Intel and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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