It’s been a seemingly quiet year for Advanced Micro Devices, Inc. (NASDAQ:AMD), up “just” 10%. Based on that performance, it may be surprising to realize AMD stock is up ~150% over the past year.
So will that performance continue or has AMD lost all of its steam? The charts and fundamentals favor the former over the latter.
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Before we get into the fundamentals, let’s look at the stock’s recent action. While shares have run into a recent string of declines, AMD stock has nearby support.
The purple line could act as support, along with the black trend line near $12. The 21-day, 50-day and should it come into play the 200-day moving average could act as support as well.
Resistance is clearly sitting around $14.50, but a retest of that level would represent a 16% rally from current levels. If AMD stock finds support between here and $12, there’s a good chance it’ll retest $14.50 sooner rather than later.
There is one caveat here and that’s the broader tech market. The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) has been showing some weakness as of late. If the overall market gets caught up in a summer pullback, AMD stock will likely come down too.
Fundamentally Speaking
When looking at AMD’s fundamentals, the situation gets rosier. At year-end 2016, Advanced Micro Devices had $1.26 billion in cash, up more than 60% year-over-year. AMD also slashed its long-term debt from $2.24 billion down to $1.46 billion, a decline of more than 35%.
Boosting cash and cutting down debt is never a bad thing.
On the negative side, Advanced Micro Devices is still losing money. However, analysts expect the company to be profitable in 2017 and grow earnings in 2018 as well. They also forecast for revenue to grow ~13% this year and another 11% in 2018.
Admittedly, margins took a dip from 2015 to 2016. But in the first quarter of 2017 gross margins were on the rebound, climbing 200 basis points to 34%. And while last quarter wasn’t the best — in-line EPS results and a miss on revenues — the company has been remarkably consistent until then.
AMD had beat earnings per share and revenue estimates four quarters in a row. Hopefully last quarter was just a blip on the radar.
Demand
Demand for the company’s Ryzen CPUs and graphic processors remains strong. There’s been chatter about AMD and Nvidia Corporation (NASDAQ:NVDA) making chips just for cryptocurrency mining.
And while that may sound a little bubbly, it still won’t stop developers and miners from gobbling up new products to boost their production.
Some analysts have called for a strong second-half for the PC market — perhaps the best since 2011. That bodes well for Advanced Micro Devices’ GPU and chip sales. Others have cited incredible demand for the RX 580 GPUs, with more sales in the first week of June than in all of May combined.
While AMD is still righting the ship in terms of the business structure, one thing is clear: demand for its products remains red-hot.
The Bottom Line for AMD Stock
There’s little question about the demand for AMD’s products. But some investors have shot against the company based on valuation. Simply put, they say it’s not worth what investors are paying.
Admittedly, I do find the valuation high. It’s tough to measure AMD on an earnings basis since it wasn’t profitable last year and is barely forecast to end in the green this year. On a sales valuation, it’s way cheaper than NVDA — with a price-to-sales ratio of 2.5x vs. NVDA’s 12.5x.
AMD’s P/S valuation is more closely relatable to Micron Technology, Inc. (NASDAQ:MU).
But again, valuing AMD stock is tough. Shares are volatile, but the business has momentum. If investors use defined risk entries and stop-losses, it will give them a chance to play AMD stock for upside, without being totally exposed on the downside.
One thing to keep in mind for those playing long though, is the broader market. A market-wide selloff will likely drag Advanced Micro Devices down with it, too.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
