Is it Too Late to Buy AMD Stock?

0:00 AMD stock is up almost 140% in 2026 and it has investors asking, is it too late to buy AMD stock or should they jump on board because this stock is just on its way higher and higher still? Well, let's look at the company. Let's look at the revenue growth trajectory. Let's look at their profit margins and let's compare them against the valuation at these prices above $500 a share and determine if I think this is still a buying opportunity or if investors should wait for a pullback before buying this semiconductor stock. I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parkev for the 10 best stocks to buy now. So, one of the reasons why AMD stock price has surged in 2026 is because the company finally delivered the huge revenue growth from the data center market that investors have been waiting for since the launch of ChatGPT. Of course, I had been recommending AMD stock as a buy all the way back in 2024 as I highlighted the company will be getting opportunities in the data center market because corporations would want to diversify away from Nvidia and want to give another opportunity to someone outside of Nvidia for this market and fast forward to today and finally AMD has captured a meaningful part of that market and management expects those market share gains to continue for the better part of the rest of this decade. And of course, as I had been rating AMD stock as a buy all throughout those years as AMD stock price was trailing Nvidia, there was a lot of you who were asking a lot of times, you know, when is AMD going to catch up to Nvidia? When is AMD going to catch up to Nvidia? And this year in 2026, it's not only caught up to Nvidia, but it's outperforming Nvidia stock by a significant margin so far in 2026. And one of the primary reasons is you can see that big jump in revenue here from 2024 to 2025 with revenues jumping from 26 billion to 35 billion with even more growth expected this year and for many years to continue.

2:23 In fact, the analysts on Wall Street that are following AMD, they're forecasting AMD's revenue growth will accelerate in 2026, jumping from the 34% growth in 2025 when its revenues reached 34.6 billion, jumping by 43% and reaching almost $50 billion in 2026, 49.4 billion to be more precise. And then, to make it even more impressive, the analysts are forecasting another year of accelerating revenue growth in 2027 with revenues jumping by 54% up to 76 billion.

3:02 And then, still growing in 2028, but decelerating with revenues surpassing $102 billion in fiscal year 2028. So, the analysts forecasting AMD's revenue will roughly triple between 2025 and 2028. And of course, that is what is primarily driving the share price growth for AMD here in 2026. So, when I see a company with booming sales, I want to check profits. Are they growing along with sales? And for AMD, yes, they are. Their profit margins and their cash flow to sales are jumping and their cash flow to sales ratio reached a record high in 2025 at 22.3% while their operating profit margin is rebounding at 10.7% it still hasn't recovered to its all-time peak of 22.2% in 2021. Overall though, if you're comparing AMD to let's say Nvidia, its margins still trail well behind Nvidia which is generating operating profit margins roughly six times that of AMD and cash flow to sales ratio roughly two and a half times that of AMD while still generating excellent revenue growth exceeding AMD's revenue growth in certain quarters.

4:30 So now that we looked at the performance metrics and expectations for future years, let's start to consider valuation because the greatest company in the world could make a poor investment if the valuation is too expensive. And for AMD when we're measuring on a market multiples basis, it's almost as expensive as it's ever been in its history. On a forward [snorts] price to earnings it's at 56 near the highest it's been going all the way back to 2024. On a forward price to operating cash flow, it's at 79. Again, almost as expensive as it's been going all the way back to early 2024.

5:10 And in fact, the only time it was more expensive was in recent weeks when the valuation was higher than where it is today. There's been a recent pullback of course. So I also like to calculate valuation based on a discounted cash flow model that I've customized for my personal use case and when measuring AMD which by the way, let me share with you the phenomenal growth I'm forecasting for AMD. So I'm forecasting 2026 free cash flow of roughly $8.3 billion and I'm forecasting that $8.3 billion in free cash flow grows to over $110 billion by 2035.

5:54 So, a more than 10x increase in the company's free cash flow I'm forecasting between 2026 and 2035. And then longer term, beyond 2035, I'm forecasting AMD's free cash flow grows by a 5% rate of growth. And I'm discounting those cash flows at a weighted average cost of capital of 13.6%. I'm estimating an after-tax cost of debt of 5 and 3/4, and a cost of equity at 16.2% using a beta of 1.95, a risk-free rate of 4 and 1/2, and a market risk premium of 6%. I'm giving them an estimated target capital structure of 25% and 75% equity, even though they don't have that much debt to equity right now. Every management team, when they have a cost of debt that's a fraction of the cost of equity, will want to shift their capital structure more towards debt and away from equity because it lowers their overall weighted average cost of capital. And the company's management team understands that professional investors and Wall Street analysts and pension funds, etc., those that are operating money portfolio managers, they use a weighted average cost of capital to discount the company's cash flow, and they understand that if they lower their weighted average cost of capital, that investors will give them credit for a lower weighted average cost of capital, which has a positive impact on the fair value calculation, since this is the figure we're using to discount all of the cash flow that the company will generate between today and the very long run. And if you're asking, "Well, why do we need to discount the cash flows at all? Can't we just take the cash flow estimates at face value? And the reason I discount these cash flows is for two reasons, primarily. Number one is the time value of money.

7:51 If I had these monies in my pocket today, I can put it in a super safe money market account and earn 4% at least in my uh account with these dollars. So, if I'm not going to get these dollars between now and the years that they're projected to arrive, I'm missing out on that cost. I'm missing out. It's the opportunity cost of capital. I need to account for that when I'm making my valuation estimates. Additionally, these estimates are not certain, right? It's a lot of assumptions, which nobody knows what's going to happen in the future.

8:31 There's a risk associated with these cash flows, and I need to account for that in some way, and that's where it goes into it in the weighted average cost of capital. So, those are the two reasons why I include a weighted average cost of capital. Of course, Warren Buffett famously uses an extremely low weighted average cost of capital, and you can decide for yourself if that's more appropriate if you want to apply a lower weighted average cost of capital.

9:00 That's your decision. It's your money. You get to decide how you value investments. This is how I do it. This has worked well for me, and so I continue using this type of valuation framework. So, all that being said, the fair value I calculated for AMD came to $362, and the current market price is above $511. So, at these market prices, AMD stock looks overvalued, whether I'm measuring on my discounted cash flow, or whether I'm using the market multiples, AMD stock looks overvalued. So, I could say that yes, it's too late to buy AMD stock, but that's not entirely true.

9:42 It's just too expensive right now. So, you might get another opportunity to buy AMD stock if the share price pulls back and the market price decreases and the valuation becomes more attractive. You might have another opportunity to buy AMD stock at more attractive valuations, but right now I don't think it's attractive. I don't think it's a buying opportunity. I have the stock rated as a hold and I will reiterate that rating today, June 12th, 2026.