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For many, the main point of investing in the stock market is to achieve spectacular returns. And we've seen some truly amazing gains over the years. To wit, the Advanced Micro Devices, Inc. (NASDAQ:AMD) share price has soared 506% over five years. This just goes to show the value creation that some businesses can achieve. It's also good to see the share price up 26% over the last quarter. It really delights us to see such great share price performance for investors.
Since the stock has added US$8.6b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
Check out our latest analysis for Advanced Micro Devices
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the five years of share price growth, Advanced Micro Devices moved from a loss to profitability. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. We can see that the Advanced Micro Devices share price is up 60% in the last three years. During the same period, EPS grew by 92% each year. This EPS growth is higher than the 17% average annual increase in the share price over the same three years. So you might conclude the market is a little more cautious about the stock, these days. Having said that, the market is still optimistic, given the P/E ratio of 53.49.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that Advanced Micro Devices has improved its bottom line over the last three years, but what does the future have in store? You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
A Different Perspective
While the broader market lost about 7.7% in the twelve months, Advanced Micro Devices shareholders did even worse, losing 28%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Longer term investors wouldn't be so upset, since they would have made 43%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - Advanced Micro Devices has 2 warning signs we think you should be aware of.