There are many reasons to be long-term bullish on Advanced Micro Devices, Inc. (NASDAQ:AMD). I’ve hit on many of the possible drivers for AMD stock in the past, including the Ryzen CPU’s potential to take market share from Intel Corporation (NASDAQ:INTC) and the new Vega GPU’s potential to threaten Nvidia Corporation’s (NASDAQ:NVDA) stranglehold on the PC gaming market.
And we have barely touched on the company’s growing influence on the Internet of Things (IoT) market and virtual reality — both of which have the potential to send AMD shares soaring as the company continues to expand into these red-hot markets.
But this week unveils a pair of challenges that could scuttle Advanced Micro Devices’ short- to intermediate-term outlook — and it’s not directly tied to fundamentals, like Josh Enomoto recently noted, or the strength of new PC video game sales as Dana Blankenhorn has suggested (though both are certainly reasons for concern).
The risk AMD stock now faces comes from the Trump administration. Today, we’ll look at the dangers, and show you a way to trade this chipmaker amid choppy waters.
Donald Trump and Advanced Micro Devices
President Trump has long said that our trade deals with China are unfavorable for the U.S., and that American companies should place their focus on hiring Americans. It’s all part of his “America First” approach to economic policy.
Both of these fronts come to a head this week. On Monday, the Department of Homeland Security promised to tighten its grip on H-1B visas, and promised “site visits” to “determine whether H-1B dependent employers are evading their obligation to make a good faith effort to recruit U.S. workers.” The impact could be huge for many Silicon Valley companies like AMD, which rely upon H-1B visas to fill key programing roles.
Meanwhile, should Trump kick off a trade war with China, AMD would be further impacted — potentially even more than competitors Intel and Nvidia, as Advanced Micro Devices relies more heavily on China as a source of revenue.
As a side note to the unfair trade deals, Trump has also labeled Korea among those that needs to be re-examined, which could impact AMD’s deal with Samsung Electronics (OTCMKTS:SSNLF) to manufacture 14nm semiconductors.
The problem is that these concerns don’t appear to be currently priced into AMD stock. If things go poorly this week with President Trump’s summit with Chinese President Xi Jinping, the short-term risks to AMD shareholders will multiply.
Sentiment and Charts
It’s a concern that AMD short sellers are already gearing up for. During the most recent reporting period, the number of shares sold short jumped by 10% to 114.9 million. Short interest now accounts for roughly 14.5% of Advanced Micro Devices’ total float, and is rising.
While these shorted shares could create a short-squeeze situation for AMD stock, the shares have given little reason of late for these bears to jump ship in a hurry.
What’s more, there is the risk of potential downgrades amid the H-1B visa crackdown and trade tensions with China. According to Thomson/First Call, 12 of the 27 analysts following AMD stock rate the shares a “buy” or better, leaving room for downgrades if the geopolitical mood sours. Furthermore, the stock is trading north of the average 12-month consensus price target of $12.25, which could lead to valuation downgrades.
Finally, AMD options traders have begun to lean toward the bears’ camp in recent weeks. Currently, the April put/call open interest ratio rests at 0.86, up sharply from readings near 0.57 in mid-March.
Click to Enlarge In other words, short sellers aren’t loading up on calls as hedges, and options traders are beginning to doubt the shares’ rally.
Overall, April implieds are pricing in a potential move of about 9.6% for Advanced Micro Devices stock through expiration. This places the upper bound at $15.89 and the lower bound at $13.11. A breach of $14 could send AMD down for a test of support at its 50-day moving average (near $13.23), while the upside is clearly limited to the $16 region.
2 Trades for AMD Stock
Put Sell: I’m not quite ready to count AMD out just yet, but short-term pressure is mounting on the shares. As such, a neutral-to-bearish play on the shares may be the safest bet when looking to bank a profit. Along these lines, an April $13 put sell position looks like a solid bet.
At last check, this option was bid at 15 cents, or $15 per contract. As usual with a put sell, you keep the premium as long as AMD stock closes above $13 when April options expire. On the downside, if the stock trades below $13 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $13 per share.
Bear Put Spread: For those expecting more downside for AMD stock, an April $13.50/$14 bear put spread may fit the bill.
At last check, this spread was offered at 14 cents, or $14 per pair of contracts. Breakeven lies at $13.86, while a maximum profit of 36 cents, or $36 per pair of contracts, is possible if AMD stock closes at or below $13.50 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
