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With a price-to-earnings (or "P/E") ratio of 45.8x Advanced Micro Devices, Inc. (NASDAQ:AMD) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Advanced Micro Devices hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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How Is Advanced Micro Devices' Growth Trending?
In order to justify its P/E ratio, Advanced Micro Devices would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. Even so, admirably EPS has lifted 612% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% per year over the next three years. That's shaping up to be materially higher than the 9.3% per annum growth forecast for the broader market.
In light of this, it's understandable that Advanced Micro Devices' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Advanced Micro Devices' P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Advanced Micro Devices maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.