Stock Market

Nvidia (NASDAQ:NVDA) proved recently that there indeed may be a ceiling for semiconductor stock prices. This is a warning sign for Advanced Micro Devices (NASDAQ:AMD) stock holders.

A sudden drop of $50/share, of which just 20% had been recouped by week’s end, hints at this eternal truth.

The AI stock market boom is vulnerable to irrational exuberance.

AMD has been riding the tail of the Nvidia boom. I got off the train $25/share ago, but it continues to chug ahead. The stock is up 155% over the last year.

When should you be concerned?

AMD’s Valuation

When looking at explosive growth stocks, analysts don’t look at things like today’s price to earnings (PE) ratio, or even the current price to sales (PS).

If they did, they might panic.

AMD stock now sells for 384 times last year’s earnings, and 14 times last year’s sales.

Instead, analysts look to the future. They say AMD sales will rise almost 50% by 2025, to $32.5 billion. They see earnings per share at $5.48. That brings the PS ratio below 10 and the PE to 56. There’s one optimist insisting AMD can earn $9.08/share next year. That’s a “forward” PE of 34.

All this assumes, of course, that the good times keep rolling. I’ve written that they should.

But business holds no guarantees. What are the risks?

AMD Risks

The primary risk to AMD stock over the next two years is that the Artificial Intelligence infrastructure boom fizzles or that PC sales don’t increase.

What might cause the former to happen is weak profits in AI applications. Right now, companies are going after the low-hanging fruit and getting good results. Hospitals, call centers, and corporate sales offices can aggregate data and deliver customers’ answers using software-generated voices, images, and text. It’s profitable for everyone.

But people like OpenAI CEO Sam Altman say the real gold is in the consumer market. He says current techniques can create “Artificial General Intelligence.” He thinks he can replace people with machines that think.

I am skeptical. I’m not alone. The chief scientist at Meta Platforms (NASDAQ:META) says artificial general intelligence isn’t coming soon.

The problem is that AI is still a computer thing. The output is limited by the quality of the input. Anyone who has seen a “self-driving car” stymied by a traffic cone can understand this. It’s true in other areas of AI as well. It is, in the end, a brute force approach aimed at specific problems.

The AI Trough

AMD stock, Nvidia, and the other AI optimists insist that a brute force approach can work on general problems, if enough force is used. That’s why our Louis Navillier insists AMD is headed to $250.

It might get there. But at some point, before it gets there, the investment ceiling will come. It always does.

I’m old enough to remember the dot-com era. The Internet, in the end, fulfilled my wildest schemes. But the optimism did get ahead of itself. Tech stocks crashed and stayed down for years. Amazon.Com (NASDAQ:AMZN) didn’t retake its 1999 high for 10 years.

The Bottom Line

You don’t have a profit on any asset until you sell it and put money in your pocket.

Some would argue you don’t even have one then, as inflation eats gains and currency is also a commodity. But it’s what engineers might call a good rule of thumb.

Every technology faces a “trough of disillusionment.” This can come when results don’t live up to expectations. It can come when the market becomes saturated. But it comes. Irrational exuberance is, in the end, irrational.

If you have a big gain in AMD stock, you can cash out any time, without guilt, as I did. But the longer you let it ride, the greater the risk you’ll be caught in a trough, which will be sudden and that could wipe out your gain.

As of this writing, Dana Blankenhorn had LONG positions in NVDA and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.

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