Key Takeaways:
- The 2-Minute Valuation Model values AMD at $175/share in 2 years.
- This implies that the stock could have 40% upside from its current share price.
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AMD stock is down over 15% since the start of 2022. Now, analysts think the stock is undervalued:
Could this be the opportunity investors have been waiting for?
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why AMD Looks Undervalued
Forecast
On AMD’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 22.7% compound annual growth rate over the next 3 years, with normalized earnings per share, or EPS, expected to grow significantly faster at 39.9% per year driven by rising profit margins:
View AMD’s full analyst estimates >>>
For context, over the past 5 years, AMD’s revenue grew at a 30.7% CAGR, which means revenue growth is slowing down slightly.
Valuation Multiple
AMD stock currently trades at around $125 per share, which means the stock trades at around 6.5 times next year’s expected revenue and nearly 28 times next year’s expected earnings.
Today, AMD is trading much cheaper than its historical average because AMD has averaged a 37x forward P/E multiple over the past 5 years:
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We’ll use a 25x forward P/E ratio in our valuation to stay conservative because the stock is expected to see stronger earnings than in the past.
Fair Value
3 years from now, AMD is expected to reach about $9.11 in normalized EPS. Let’s use a more conservative $7 in normalized EPS in our valuation because these growth estimates might be a little high.
At a 25x forward P/E multiple, that values AMD stock in 2 years at $175/share.
(The NTM P/E multiple uses the next twelve months’ expected earnings, so a 2-year valuation uses 3-year EPS forecast figures.)
With the stock trading at about $125 today, this implies that AMD could rise 18.3% per year over the next 2 years, or 40% in total, to reach this fair value:
Analysts also think the stock is considerably undervalued.
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Analysts’ Price Target
The consensus analyst price target for AMD today is about $183 per share, which means analysts think the stock has nearly 50% upside.
In the graph below, the blue line measures the upside analysts saw for AMD stock. When the blue line was high, analysts thought AMD was undervalued.
You can see that analysts were right about $AMD stock being undervalued in 2022 and at the end of the year in 2023. Today, they also think the stock is strongly undervalued:
It’s important to remember that analysts’ price targets aren’t always accurate and can suffer from many biases.
Still, analysts think the stock is undervalued, which supports the valuation from our 2-Minute Valuation Model.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like AMD stock is well undervalued today, and the stock could go up 40% in the next 2 years.
This is just our analysis and opinion based on analysts’ estimates. While AMD stock might be undervalued, no one can perfectly predict short-term stock movements or long-term business developments.
Don’t take our word for it—try it out for yourself! Analyze AMD or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
