Shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) have been struggling, falling over 4% since the last day of July. Although the decline may be disheartening, it could be the buying opportunity investors have been waiting for. Add in the fact it’s launching new super chips and AMD stock could be even more enticing.
Let’s Rewind on AMD Stock
AMD stock initially rallied after AMD reported earnings. It beat on earnings and revenue estimates and guidance came in ahead of expectations.
Analysts were torn on the quarter. Some made the case that shares were overvalued, while others argued that the turnaround continues to gain momentum.
Oddly enough, both could be right. As a result though, we took a closer look at the results. Guidance wasn’t just strong for next quarter, it was strong for the full fiscal year. While expectations are climbing, management still left room to beat, though. Beat and raise — what more can you ask for?
Additionally, margins are on the rise as AMD is working its way from operating in the red to being in the black. The hope is that operations swing to the green. Debt also continues to fall at a fast pace, which is encouraging. AMD currently carries $1.42 billion in total debt, vs. $2.24 in the same quarter one year ago.
All in all, AMD’s business is moving in the right direction, allowing AMD stock to do the same. Without a more negative factor to consider, we find it hard to be short AMD stock at this point.
The Chips
AMD is out with a new super chip designed to compete with companies like Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC). The new Threadripper GPU units (part of the Ryzen line, which justly recently launched a few more models) should bode well for margins.
AMD is using these chips to go after the high-end PC market. With gaming, virtual reality, cryptocurrency mining and other industries demanding high-powered computing, these types of chips remain in high demand. It’s why Nvidia is doing well, as is Intel’s Core i9 chip.
Of course, just because AMD’s out with its new Threadripper chip doesn’t mean it will be a cakewalk. It will have strong competition — with many considering Nvidia as the best. But because AMD has historically been price-aggressive, that tells us that it will likely steal market share — likely at INTC’s expense. And while that may bring up concerns over margins, the higher price point than AMD’s other offerings should ensure that margins again expand in 2017.
All in all, it should be viewed as a positive that AMD continues to release cutting-edge GPU units. While it’s not a direct correlation, also consider how well video game companies have been doing. Despite massive stock rallies and ever-rising expectations, Take-Two Interactive Software Inc (NASDAQ:TTWO), Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) all beat earnings per share and revenue expectations.
Consumer demand and e-sports leagues are driving demand in the gaming world. Graphic chip and component companies like AMD and NVDA are well-known in this arena and should continue to benefit as a result.
Trading Advanced Micro Devices
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After its latest report, AMD stock shot up to $15.50. After a rapid reversal, this level is now very clear resistance.
Unfortunately for bulls, AMD stock has a lost a lot of its short-term momentum. The purple trend line that’s been in place since May no longer supports the stock. In fact, on Monday this level acted as resistance as well. The momentum-measuring MACD (orange circle) is also no longer bullish.
However, there could be a bullish development in AMD stock. If shares find support between $12.50 and $13, Advanced Micro Devices could be setting up for a move higher. If that’s the case, we can look for AMD to retest its highs near $15.50 and possibly break out.
How do we play? I like a fundamental story that continues to improve. When technicals lineup alongside it, we may have an edge. If AMD stock finds support near $12.50, we can go long with a stop-loss just below that level. Even a rally from $12.50 to $15 would be 20% upside from current levels.
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.
