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Buying Advanced Micro Devices, Inc. (AMD) Stock? Wait for a Pullback

Back on Dec. 21, and again on Jan. 12, yours truly here touted Advanced Micro Devices, Inc. (NASDAQ:AMD) as one of the market’s most compelling (and investment-worthy) turnaround stories. Though, I was worried AMD stock was a bit too overextended for its own good, I completely understood the strong bullish sentiment even as I feared a profit-taking pullback.

Buying Advanced Micro Devices, Inc. (AMD) Stock? Wait for a Pullback

Well, last week’s earnings report largely vindicated my broad optimism. On the flipside, the rally AMD has dished out since my last look has exacerbated its overbought condition.

I stand by the original thesis. That is, AMD stock is a buy on any decent-sized dip. As it just so happens, the low of that dip is now likely to be above the low point I had in mind just a few weeks ago.

The Best Is Yet to Come

As a refresher, or in case you missed it, the maker of computer processors and other computer chips lost one cent per share of AMD stock for its fourth fiscal quarter, on revenue of $1.1 billion. The loss was in line with expectations, and the top line was 15% better than expectations. More important, both figures were marked improvements on year-ago numbers; the company lost 13 cents per share in its fourth quarter of 2015.

To those who’ve been loosely keeping tabs on Advanced Micro Devices, the growth makes sense. AMD has been irrelevant for years, losing out to processors from Intel Corporation (NASDAQ:INTC), but also ceding ground to Nvidia Corporation (NASDAQ:NVDA) and Qualcomm, Inc. (NASDAQ:QCOM) in the mobile processor and chip market. Last year though, whispers of a game-changing CPU (central processing unit) and a game-changing GPU (graphics processing unit) surfaced. If the rumors were true, it was only a matter of time before Advanced Micro Devices started winning back market share.

As it turns out, the rumors were true.

The processor, nicknamed Ryzen, is the first entry in the Summit Ridge line of desktop processors are a true 8-core, 16-thread CPU with a base operating speed of 3.4 GHz. That’s a bit stronger than the most comparable processor from Intel, the Core i7-6900K, which operates at a base frequency of 3.2 GHz. The i7 can be boosted up to 4 GHz; it’s not exactly clear exactly how fast the Ryzen can be pushed, though it’s likely to be in that 4 gigahertz ballpark.

The new GPU technology, called Vega, is a second-generation high bandwidth memory (or HBM2) design found on a stacked-memory architecture that performs significantly better than the more common GDDR5 (double data rate type-five) utilized by most graphics processing units today. An essentially-infinite amount of memory can be dedicated to handling the display — the maximum virtualization is capped at a ridiculous 512 terabytes. This platform is about twice as powerful as most current alternatives, and will make Advanced Micro Devices competitive with the newest generation of GPU architecture from Nvidia, called Pascal.

Thing is, last quarter’s huge results had nothing to do with Ryzen or Vega. Ryzen won’t be available until the end of this month or early March, and Vega won’t be out until May. Everything AMD did last quarter it did solely with its least dramatic wares.

Just think what kind of growth it will achieve once Vega and Ryzen are available.

AMD Stock Is Still Tough to Buy

With the best yet to come, it’s not difficult to understand why AMD stock has soared 31% just since its Jan. 31st earnings report.

Helping out to that end is the expected revenue growth rate of 18% for the quarter currently underway, That might be — and probably is — a low-balled estimate. The company didn’t provide full-year guidance, but analysts expect a swing back to a profit of six cents per share of AMD stock on roughly a 10% improvement in sales.

Still, up more than 500% for the past twelve months, Advanced Micro Devices shares just can’t have much, if any, gas left in the tank. As stoked as the market may be and as bullish as the chatter is, AMD stock is simply too frothy to buy here.

The forward-looking price-earnings ratio of 48.7 (and that’s based on 2018’s expected improvement in profitability from 2017’s outlook) is simply too rich to maintain through next year. We’re due for a dip.

Bottom Line for Advanced Micro Devices

As for where any pullback may come to a close and a rally gets rekindled, there are key Fibonacci retracement levels around $9.40 and $6.30, both of which correspond with other major lows AMD stock has logged since the first half of last year.

Advanced Micro Devices, Inc. (NASDAQ:AMD) chart, with Fibonacci lines
Click to Enlarge 
Both are potential, and even likely, bottoms, with the lower of the two coming into play should the former one fail as a floor. It would be very surprising if the Fibonacci level around $9.40 buckled though, considering the sentiment in play.

A dip of either magnitude is a bit difficult to imagine now, but it can’t be ruled out. As amazing as the turnaround story has become, there’s still very little fundamental justification for the stock’s current price. AMD stock was trading in the low $9’s just four weeks ago, with only a little less certainty and clarity than it boasts now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/02/buy-advanced-micro-devices-inc-amd-stock-after-a-pullback/.

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