Shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) have been on a tear. While AMD stock is up 17.6% in 2017, it’s higher by more than 250% over the past year. Talk about impressive. But investors really want to know if the AMD stock rally can continue.
Advanced Micro Devices is a tough one. Investors feel that because shares traded below $2.50 just 16 months ago, that they’ve missed the train.
Admittedly, given its more than five-fold return, the easy money is gone. But that doesn’t mean AMD stock can’t go from $13 to $16 or even higher. Or at least back to its 52-week high of $15.55 — a return of nearly 20%.
Of course, it’s far easier to buy a stock when we can assess its value. That’s harder with Advanced Micro Devices though because the company has made so many changes.
Advanced Micro Devices: The Fundamentals
AMD stock is far more attractive than it was a year ago. At year-end 2015, AMD closed with $785 million in cash and $2 billion in debt. By year-end 2016, its cash balanced climbed 61% to $1.26 billion, and its debt fell 28.5% to $1.43 billion.
Obviously these improvements have been given a thumbs up by Wall Street. The fact that Advanced Micro Devices will be barely profitable in 2017 is unattractive. However, it trades at 46 times 2018 estimates, which call for 29 cents in earnings per share. These estimates could be too low, though.
Consider that AMD missed or reported in-line earnings-per-share results in seven straight quarters. In that span, Advanced Micro only had one revenue beat. Since then though, the company has beaten EPS and revenue estimates for four straight quarters. Average estimates call for 29 cents in EPS for 2018. While the Street-high estimate of 79 cents per share is likely too high, 29 cents could prove to be too low.
From a valuation standpoint, it’s hard to find AMD stock attractive. The hope is that the company — like Nvidia Corporation (NASDAQ:NVDA) — remains in a strong position in its end markets and continues to improve. For investors, long-term value could be present even if the ride is volatile.
Advanced Micro Devices: The Technicals
The charts are not the most bullish, but one could expect some exhaustion after rallying 250% in a year. On the chart, AMD has a declining RSI (top orange line) and waning momentum on the MACD (bottom orange oval).
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However, its trend line (in purple) is hard to miss. After serving as resistance in late-2016, it has now become support. The problem is momentum has been slowing over the last few months.
AMD stock is churning between $13 and $15 and that trend line can go two ways: continue as support or turn to resistance. For now, we must assume it will hold as support until proven otherwise.
There should also be decent support in the $12.40 to $12.50 area, as indicated by the black line. Traders can wait for a pullback and use the trend line as a buying opportunity. They can also buy Advanced Micro Devices stock near current levels and use a break below this area as their stop-loss.
The Bottom Line for AMD Stock
While some will want to trade Advanced Micro, the focus on the long-term is important. The company is in a good position with its business and has made positive changes in its financial structure. While the share price could gyrate quarter-to-quarter, I think the overall trend will be higher.
Although AMD’s short interest isn’t exuberantly high, standing at 14% isn’t exactly low either. Meaning a short-covering rally could spur the stock price higher as shorts look to “buy to cover” their position. But what could cause such an event? Investors need to be mindful of a couple upcoming events. First, Advanced Micro Devices has its annual shareholder meeting on Wednesday, April 26. Second, it reports quarterly earnings on Monday May 1st.
Either of those events could knock AMD stock down, or drive it higher. If its nearby support fails, look to the 100-day moving average to come into play. Investors looking to get long could consider a half-position now. Once these events are over and more clarity is available, they can reevaluate their position.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
