Over the last three months optimism over Artificial Intelligence infrastructure has become a mania. No stock has benefited like Advanced Micro Devices (NASDAQ:AMD) stock. Since just before Halloween, AMD stock is up 65%. That’s even better than Nvidia (NASDAQ:NVDA), which is up 44%. By way of comparison, the S&P 500 is up just 15%.
While I recommended owning AMD stock in November, I had reservations. I felt defensive about the call. That the call to hold was right doesn’t mean I have changed my mind. AMD is overvalued.
Why AMD Stock is Overvalued
I’m not the only writer flummoxed by AMD’s stock surge. Northland recently “downgraded” AMD to neutral, and analyst Gus Richard admitted he has no idea how to rate it.
I do. Sell.
You’re paying 13 times revenue for a company that isn’t even the market leader? You’re paying 1,400 times earnings for the horse in second place? You loved Secretariat and bought Sham? (Please note. Sham was a fine horse.)
AMD has a nice, new AI chip in the Instinct. It’s dubbed “LamniAI,” as in Large Language Models for enterprises.
Some of the excitement around AMD stock concerns chip supplier Taiwan Semiconductor (NYSE:TSM), which had record results. But Taiwan Semi makes chips for many companies, including Nvidia. That’s just fishing for an excuse.
When you’re fishing for an excuse, it means the fish ain’t biting.
When You Leave
If you’re going to follow my suggestion and sell AMD, do it before Jan. 30. That’s when earnings come in.
Analysts are looking for net income of 77 cents/share on revenue of $6.12 billion. That sounds like a low bar because it is. Revenue would be up 9.3% from December of 2022, and earnings up 11%.
AMD will easily clear those estimates but that’s no reason for the stock to rise. And it’s not that the future is shrouded in doubt, just that it isn’t as bright as the stock price makes it seem.
When AI?
There are three phases to the AI boom.
First, you build the infrastructure. That’s why AMD is trading far beyond its ability to deliver.
Next, you build the applications. That’s what Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) are doing on a macro level. It’s what Salesforce.com (NYSE:CRM) and ServiceNow (NYSE:NOW) are doing on a corporate level.
Then you need to deliver outsized earnings from those applications, as Adobe (NASDAQ:ADBE) is trying to do.
But what would be the result? It should mean lower costs and higher profits. But it will also mean higher unemployment, at least in the short term. It should mean higher risks, as some solutions don’t deliver on promises. It should mean unintended consequences, which no one is foreseeing.
As Adam Savage said on Mythbusters, well there’s your problem. Stocks go from solid investment to overpriced whenever hype gets out ahead of results. We saw this in 2021, and we’re seeing it again.
The Bottom Line on AMD Stock
Telling you to sell AMD doesn’t mean I don’t like AMD.
I love AMD. I just don’t like it at these prices.
There’s a process every new technology goes through, of euphoria giving way to a hangover, and only then finding its footing. The folks at Gartner Group (NYSE:IT) call this the “hype cycle,” and it’s been working ever since I started covering technology 40 years ago.
AMD stock buyers are drunk right now. Its holders include a lot of speculators who are going to run at the first sign of trouble. Maybe this is the first sign. Maybe the first sign comes after earnings. Maybe it comes after that. Maybe I’m leaving money on the table by bailing out now.
I’m just going to wait for the dip before buying again.
As of this writing, Dana Blankenhorn had LONG positions in NVDA, TSM, MSFT, GOOGL, CRM and NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.